Terminal Wealth As a Fiduciary Prudence Metric: Why ERISA Plan Fiduciaries Should Incorporate Wealth Preservation and Capital Preservation into the Evaluation of In-Plan Annuities and Alternative Investments

Posted on August 4, 2026 by jwatkins

James W. Watkins, III, J.D., CFP EmeritusTM, AWMA®
InvestSense, LLC

Abstract

Modern portfolio construction has historically emphasized maximizing expected returns for a given level of risk. Within defined contribution plans governed by the Employee Retirement Income Security Act of 1974 (“ERISA”), however, fiduciaries are not charged with maximizing returns in the abstract. Rather, they are obligated to act prudently and solely in the interests of plan participants and beneficiaries, with the exclusive purpose of providing retirement benefits. This distinction is significant. The ultimate objective of retirement investing is not to maximize periodic or benchmark-relative returns but to maximize participants’ sustainable retirement outcomes—that is, their terminal wealth.

This post argues that the concept of terminal wealth should become an explicit component of ERISA fiduciaries’ evaluation of in-plan annuitiews and alternative investments. Properly understood, terminal wealth encompasses not merely cumulative returns but also wealth preservation, capital preservation, mitigation of sequence-of-returns risk, and the reduction of catastrophic losses that permanently impair retirement security. Because ERISA’s fiduciary standards focus on participant welfare rather than asset-class orthodoxy, incorporating terminal wealth into investment analysis is not only permissible but is arguably required where evidence demonstrates that certain alternative investments improve expected retirement outcomes through superior risk-adjusted wealth preservation.

Introduction

ERISA fiduciaries occupy a unique legal position. Unlike ordinary investors, whose objectives may vary from speculation to wealth maximization, ERISA fiduciaries must pursue one objective: advancing the financial interests of plan participants and beneficiaries.

For decades, institutional investment practice has largely equated prudence with diversification under Modern Portfolio Theory (“MPT”), emphasizing expected returns, volatility, and correlation. Although these remain valuable analytical tools, they are only proxies for the ultimate objective of retirement investing.

Participants do not retire on Sharpe ratios. They retire on accumulated wealth.

Consequently, the relevant fiduciary inquiry is not whether an investment outperforms an index in any particular year, but whether including that investment increases the probability that participants achieve greater sustainable retirement wealth at retirement while reducing the likelihood of catastrophic loss. The concept of terminal wealth provides precisely this framework.

Alternative investments—including private credit, infrastructure, private real estate, certain hedge fund strategies, and other diversifying assets—have increasingly demonstrated their capacity to improve long-term portfolio efficiency by reducing downside risk, dampening volatility, and mitigating severe drawdowns. These characteristics directly affect participants’ terminal wealth because retirement savings are path dependent. A substantial loss late in an accumulation period may permanently impair retirement readiness even if long-run average returns remain unchanged.

Accordingly, this post contends that fiduciaries should evaluate alternative investments and in-plan annuities not solely through traditional measures of expected return, but through their expected contribution to participants’ terminal wealth.

I. ERISA’s Fiduciary Standard Focuses on Participant Outcomes Rather Than Asset-Class Preferences

Section 404(a)(1) of ERISA establishes four foundational fiduciary obligations:

  • the duty of loyalty;
  • the duty of prudence;
  • the duty to diversify; and
  • adherence to governing plan documents insofar as they are consistent with ERISA.

Most significant here are the duties of prudence and loyalty.

The duty of loyalty requires fiduciaries to act “solely in the interest” of participants and beneficiaries and for the exclusive purpose of providing benefits. This obligation directs fiduciaries toward participant welfare rather than institutional convention or industry custom.

Similarly, prudence requires fiduciaries to employ the care, skill, prudence, and diligence that a prudent expert would exercise under similar circumstances.

Importantly, ERISA evaluates fiduciary conduct through utilization of a prudent process rather than investment outcomes. Courts consistently recognize that fiduciaries are not guarantors of investment performance. Rather, they must undertake a reasoned, informed, and appropriately documented decision-making process.

Nothing within ERISA requires fiduciaries to prefer public equities over private markets, passive investments over active management, or traditional asset classes over alternatives.

The statute is deliberately investment-neutral. Consequently, the legal question is not whether alternatives or in-plan annuities are unconventional but whether their inclusion reflects a prudent process reasonably designed to improve participant outcomes.

II. Terminal Wealth Better Reflects ERISA’s Objectives Than Periodic Return Maximization

Terminal wealth measures the value of an investor’s portfolio at the conclusion of the investment horizon. Unlike annualized returns, terminal wealth captures the cumulative effects of:

  • compound returns;
  • volatility;
  • downside losses;
  • sequence-of-returns risk;
  • capital preservation; and
  • reinvestment over time.

For retirement investors, terminal wealth represents the actual economic objective.

Two portfolios may exhibit identical average annual returns while producing materially different retirement balances because of differences in volatility and drawdowns.

For example, a 40 percent decline requires a subsequent gain of approximately 67 percent merely to recover principal. During this recovery period, participants lose valuable years of compounding.

Thus, capital preservation is not simply a conservative investment preference. It is mathematically linked to maximizing long-term wealth.

Alternative investments that reduce severe drawdowns may therefore produce higher terminal wealth even if their expected arithmetic returns equal—or are modestly lower than—those of traditional public equities.

III. Wealth Preservation Is Consistent with ERISA’s Duty of Prudence

Prudence requires fiduciaries to evaluate foreseeable risks.

Risk under ERISA is not synonymous with volatility. Rather, the Supreme Court has emphasized that fiduciaries must evaluate investments in light of the portfolio as a whole and the purposes of the plan.

Within retirement investing, one of the most significant risks is permanent impairment of retirement capital. This distinction is critical.

Temporary volatility that does not impair long-term wealth may be tolerable. Permanent capital loss is not.

Alternative investments frequently seek to reduce:

  • equity market beta;
  • correlation with traditional markets;
  • downside capture;
  • inflation risk;
  • liquidity mismatches over long investment horizons; and
  • concentration risk.

Each of these characteristics may contribute to preserving retirement assets through adverse market environments.

A prudent fiduciary therefore may conclude that lower downside risk justifies allocating a portion of plan assets to alternatives despite reduced liquidity or increased complexity, provided those characteristics are appropriately evaluated.

IV. Capital Preservation Advances the Duty of Loyalty

The duty of loyalty demands more than impartial investment selection. It requires that every fiduciary decision be made exclusively for participants’ benefit. Participants’ interests are measured by retirement security, not benchmark-relative performance.

Suppose two diversified portfolios possess identical expected returns. Portfolio A experiences materially smaller drawdowns and higher expected terminal wealth. Portfolio B produces larger interim gains during bull markets but significantly greater losses during bear markets.

If the evidence demonstrates that Portfolio A more reliably delivers retirement benefits, loyalty favors Portfolio A.

The fiduciary’s obligation is not to maximize excitement, innovation, or even annual returns. It is to maximize participants’ retirement welfare. Terminal wealth operationalizes this principle.

V. Alternative Investments May Improve Terminal Wealth Through Risk Management

The empirical literature increasingly demonstrates that carefully selected alternative investments may improve diversified portfolios by reducing overall risk while maintaining competitive expected returns.

Examples include:

  • private infrastructure generating relatively stable inflation-linked cash flows;
  • private credit providing contractual income with lower correlation to public equity markets;
  • diversified real estate offering inflation protection and income generation;
  • market-neutral hedge fund strategies designed to reduce downside exposure; and
  • certain absolute-return strategies emphasizing capital preservation.

Not every alternative investment satisfies fiduciary standards. Some exhibit excessive fees, leverage, opacity, or valuation uncertainty.

ERISA does not require fiduciaries to adopt alternatives indiscriminately. Rather, it requires disciplined evaluation.

The appropriate inquiry asks whether the investment’s expected contribution to participant retirement outcomes outweighs its costs and risks.

Terminal wealth provides a framework for answering precisely that question.

VI. Sequence-of-Returns Risk Demonstrates Why Terminal Wealth Matters

Traditional mean-variance optimization often understates sequence-of-returns risk. Because retirement investing relies upon continuous contributions and compounding, losses occurring immediately before retirement disproportionately reduce lifetime retirement income.

Alternative investments that reduce large drawdowns may therefore increase retirement security despite modestly reducing upside capture. This asymmetry reinforces the importance of capital preservation. Protecting participants from severe losses shortly before retirement directly advances ERISA’s purpose of delivering retirement benefits.

VII. Fiduciary Process Should Explicitly Consider Terminal Wealth

A prudent fiduciary evaluating alternative investments should incorporate analyses beyond expected return.

Relevant considerations include:

  1. expected terminal wealth across multiple market scenarios;
  2. stress testing under adverse economic environments;
  3. maximum historical and simulated drawdowns;
  4. probability of retirement shortfall;
  5. sequence-of-returns sensitivity;
  6. inflation-adjusted retirement income projections;
  7. diversification benefits;
  8. liquidity appropriate to participant demographics;
  9. fee reasonableness relative to expected participant benefit; and
    stress testing under adverse economic environments: and
    10. stress testing under adverse economic environments.

These factors align more closely with ERISA’s participant-centered objectives than reliance upon historical benchmark-relative returns alone.

VIII. Potential Objections

The principal objection is that alternatives introduce greater complexity, valuation uncertainty, and fees. These concerns are legitimate.

However, ERISA does not prohibit complexity. It requires informed evaluation. Complex investments may be prudent where their risks are understood, monitored, and outweighed by expected participant benefits.

Likewise, higher fees do not violate ERISA per se. The Supreme Court has recognized that fiduciaries may prudently select higher-cost investments when those investments provide commensurate value.

Thus, the relevant inquiry is whether higher costs reasonably enhance participants’ expected retirement outcomes, including improved terminal wealth through reduced downside risk.

IX. Implications for Defined Contribution Plans

Historically, defined benefit plans adopted alternative investments more readily because professional fiduciaries controlled asset allocation. Defined contribution plans increasingly resemble defined benefit plans in investment sophistication through target-date funds, collective investment trusts, and professionally managed default investments.

As participant investment horizons often span thirty to forty years, many alternative investments possess liquidity profiles compatible with retirement investing.

Consequently, fiduciaries should not categorically exclude alternatives based solely upon historical practice. Rather, they should determine whether such investments improve expected participant retirement outcomes measured by terminal wealth.

X. Terminal Wealth and Procedural Prudence Process

ERISA is fundamentally concerned with outcomes that matter to participants: secure retirement benefits achieved through prudent, loyal, and well-informed fiduciary decision-making. The statute does not prescribe particular asset classes or investment philosophies. Instead, it requires fiduciaries to employ a prudent process focused on participants’ best interests.

Terminal wealth provides a more faithful expression of that objective than conventional measures emphasizing annualized returns or benchmark-relative performance alone. By integrating capital preservation, wealth preservation, downside-risk mitigation, sequence-of-returns risk, and long-term compounding into a unified framework, terminal wealth aligns investment analysis with the statutory purpose of delivering retirement security.

Accordingly, plan fiduciaries should expressly evaluate whether alternative investments enhance participants’ expected terminal wealth on a net-of-fees basis and within the context of the portfolio as a whole. Such an approach is fully consistent with ERISA’s duties of prudence and loyalty. Indeed, where credible evidence demonstrates that carefully selected alternative investments are reasonably expected to improve long-term retirement outcomes by preserving capital, reducing catastrophic losses, and increasing sustainable retirement wealth, a fiduciary’s failure to consider those investments may itself be difficult to reconcile with ERISA’s participant-centered mandate.

The evolution of fiduciary practice should therefore move beyond a narrow emphasis on expected returns and embrace terminal wealth as a central analytical metric. Doing so does not redefine fiduciary duty; it more accurately fulfills it by aligning investment decision-making with the retirement security ERISA was enacted to protect.

With regard to in-plan annuities, ERISA fiduciary law does not presume that annuities are imprudent. Terminal wealth provides a more complete fiduciary metric for comparing annuities with non-annuitizing income-producing alternatives. In other words, fiduciaries should evaluate the economic tradeoffs of irrevocable annuitization—including the surrender of capital—against strategies that may generate comparable retirement income while preserving assets. That argument is consistent with ERISA’s process-based standard and avoids overstating what the law requires..

XI. Terminal Wealth as a Superior Fiduciary Framework for Evaluating Lifetime Income Products

The growing emphasis on guaranteed lifetime income within defined contribution plans presents an important test of ERISA’s fiduciary standards. Congress, through the SECURE Act of 2019 and the SECURE 2.0 Act, has sought to facilitate participant access to lifetime income products by reducing perceived legal barriers to the selection of insurers and by encouraging retirement income disclosures. These legislative developments, however, should not be understood as establishing a fiduciary preference for annuities or other forms of mandatory annuitization They do not!

Rather, they preserve the fiduciary’s obligation under ERISA § 404(a) to engage in a prudent, participant-centered evaluation of whether a particular retirement income strategy is reasonably expected to advance participants’ financial interests. Terminal wealth provides an analytical framework for conducting precisely that evaluation.

Traditional analyses of annuity products frequently emphasize the certainty of periodic income while treating the conversion of accumulated retirement savings into an irrevocable income stream as an acceptable or unavoidable feature of retirement planning. From the perspective of retirement security, however, this approach evaluates only one side of the participant’s economic position. It measures the income produced by the contract but does not fully account for the economic consequences of permanently relinquishing ownership of the underlying retirement assets.The distinction is economically significant.

Under a conventional immediate or deferred life annuity, the participant exchanges accumulated retirement assets for a contractual promise of future income. Upon annuitization, ownership and control of the investment principal generally passes to the insurer, and the participant’s estate ordinarily has no claim to the remaining capital unless the contract includes specific death-benefit, refund, period-certain, or similar guarantees. Those contractual protections are frequently purchased through optional riders or alternative payout structures that generally reduce the amount of lifetime income payable or increase the overall cost of the contract.

From a terminal wealth perspective, these features represent a measurable economic cost rather than merely a contractual characteristic. The participant receives mortality insurance and longevity protection in exchange for surrendering liquidity, flexibility, investment control, and, in many cases, the opportunity for any residual capital to remain available for future contingencies or intergenerational transfer. ERISA’s fiduciary framework requires that these economic tradeoffs be evaluated rather than assumed away.

The duty of prudence requires fiduciaries to consider all material characteristics of competing investment alternatives. The duty of loyalty requires that those characteristics be assessed exclusively from the perspective of participant welfare. Accordingly, when evaluating lifetime income products, fiduciaries should consider not only the stability of the income stream but also the effect of annuitization on participants’ expected terminal wealth.

This broader analysis may reveal meaningful differences between competing retirement income strategies. Consider two hypothetical retirement solutions.

The first converts $1,000,000 into an immediate lifetime annuity producing a guaranteed monthly payment. The participant relinquishes ownership of the investment principal upon annuitization. If the participant dies relatively early, the remaining capital generally remains with the insurer absent contractual guarantees that typically reduce the initial payout or require additional cost. The participant receives valuable longevity insurance, but at the expense of permanently surrendering control of accumulated retirement wealth.

The second strategy allocates the same assets among diversified investments—including, where appropriate, alternative investments designed to generate durable income, moderate volatility, and preserve capital. The participant withdraws income under a disciplined distribution policy while retaining ownership of the underlying portfolio. Assuming prudent investment performance, the participant continues to possess residual capital throughout retirement, retains flexibility to adjust withdrawals as circumstances change, and may leave remaining assets to beneficiaries.

Neither strategy is inherently superior in every circumstance. A participant with limited assets, impaired health, exceptional longevity risk, or no desire to preserve assets for heirs may rationally prefer guaranteed lifetime income notwithstanding the surrender of principal. Conversely, a participant with sufficient retirement assets, a preference for liquidity, or a desire to preserve financial flexibility may derive greater overall economic benefit from a strategy that seeks both sustainable income and continued ownership of investment capital.

Terminal wealth allows fiduciaries to evaluate these alternatives using a common economic metric. Rather than focusing exclusively on nominal income payments, terminal wealth measures the participant’s aggregate economic position throughout retirement by incorporating income received, remaining portfolio value, the probability of asset depletion, the effects of inflation, liquidity, mortality assumptions, and the expected value of any residual assets. This approach recognizes that retirement security is multidimensional. Income certainty is unquestionably valuable, but so too are financial flexibility, capital preservation, and the ability to respond to unforeseen expenses such as long-term care, family support obligations, or unexpected medical costs.

Moreover, terminal wealth highlights an important economic feature of irrevocable annuitization that may otherwise receive insufficient attention in fiduciary analysis. In many annuity structures, participants who die significantly earlier than actuarially anticipated subsidize payments to longer-lived annuitants through the pooling of mortality risk. This mortality-credit mechanism is the fundamental source of longevity insurance and is not, in itself, evidence of fiduciary imprudence. Nevertheless, from the standpoint of the individual participant, the expected economic value of relinquished capital is a material consideration that should be weighed alongside the benefits of guaranteed income

However, mortality credits are based on an unknown, the annuity owner’s continued survival, and therefore mortality credits are speculative and should never be included in an analysis of in-plan annuities. Fiduciaries acting prudently should understand and evaluate the speculative nature of mortality credits rather than focusing exclusively on projected income streams.

Importantly, this analysis does not argue that lifetime annuities are imprudent or inconsistent with ERISA. Rather, it argues that ERISA’s duties of prudence and loyalty require fiduciaries to compare annuities with reasonably available alternatives using evaluation metrics that fully capture participant welfare. If a non-annuitizing strategy can reasonably be expected to deliver comparable retirement income while preserving meaningful capital, maintaining liquidity, and providing greater financial flexibility at comparable risk and cost, those characteristics constitute material economic benefits that belong within the fiduciary’s decision-making process.

Viewed in this manner, terminal wealth does not diminish the value of guaranteed lifetime income. Instead, it broadens fiduciary analysis beyond income alone to encompass the participant’s total economic welfare. Because ERISA requires fiduciaries to act solely in participants’ interests and for the exclusive purpose of providing retirement benefits, a framework that simultaneously measures retirement income, capital preservation, liquidity, flexibility, and residual wealth more faithfully reflects the statute’s participant-centered objectives than one that evaluates retirement products principally by the magnitude of their periodic income payments.

terminal wealth expands—not rejects—the analytical framework by explicitly incorporating the economic value of retained capital, liquidity, flexibility, and residual estate value into the fiduciary prudence equation.

XII Fiduciary Decision-Making Under Uncertainty:

Fiduciaryprudence requires fiduciaries to distinguish between contractual guarantees and probabilistic expectations. A fiduciary should not equate an uncertain, participant-specific realization of mortality credits with guaranteed economic value, particularly where that comparison may obscure material tradeoffs, including the irrevocable surrender of investment principal, loss of liquidity, diminished financial flexibility, and the potential forfeiture of residual assets.

That argument is consistent with ERISA’s emphasis on informed and balanced decision-making.

Terminal wealth evaluates economic outcomes that are either realized or reasonably measurable:

  • income received;
  • remaining account value;
  • preserved capital;
  • liquidity;
  • purchasing power;
  • residual estate value.

By contrast, the incremental value attributable to mortality credits for any individual participant is contingent on an uncertain lifespan. It cannot be known when the fiduciary makes the investment decision.

Because fiduciaries are required to evaluate investments using material facts reasonably available at the time of the decision, greater analytical weight should be afforded to objectively measurable economic attributes—such as capital preservation, expected cash flows, liquidity, fees, and residual asset values—than to participant-specific gains that depend on unknowable future longevity. Terminal wealth naturally emphasizes these measurable attributes and therefore provides a more reliable framework for comparing retirement income strategies and avoiding unnecessary fiduciary liability.

XIII Guaranteed Contractual Benefits vs. Contingent Actuarial Benefits

Plan sponsors and other investment fiduciaries must be able to differentiate between  “guaranteed contractual benefits” from “contingent actuarial benefits.” Fiduciaries should categorize retirement product attributes as follows:

  1. Guaranteed contractual benefits (e.g., stated income payments while alive, contractual death benefits, guaranteed withdrawal benefits, explicit guarantees).
  2. Measurable economic costs (e.g., fees, loss of liquidity, surrender of principal, tax effects, opportunity costs).
  3. Contingent actuarial benefits (e.g., mortality credits that may or may not be realized by a particular participant, depending on longevity). F

Investment fiduciaries must be able to understand and recognize all three categories, but to avoid assigning the same evidentiary weight to contingent actuarial benefits as to guaranteed contractual rights or objectively measurable economic costs. That formulation is likely to be more persuasive than asserting that mortality credits should be disregarded altogether, because it acknowledges their role while arguing they should receive appropriately limited weight in a participant-centered fiduciary analysis.

One thing we stress to our fiduciary risk mitigation clients with regard to fiduciary prudence:  the question is rarely whether an investment later performed well or poorly; the question is whether the decision-making process leading to the recommendation satisfied the applicable standard when the decision was made.

As a former securities compliance director, I often reference the following analogy: A stockbroker is generally not liable merely because a recommended security performs poorly.. Markets fluctuate. Investment risk is inherent. The relevant inquiry under suitability principles—and now under Regulation Best Interest—is whether the recommendation was reasonable when made based on the investor’s circumstances, objectives, risk tolerance, and the information reasonably available at the time.

The analogy to ERISA is compelling:

  • The product is not automatically the problem.
  • The outcome is not automatically evidence of breach.
  • The process surrounding the recommendation is the critical inquiry. .

XV. Going Forward: Fiduciary Prudence and the Primacy Of the Decision-Making Process

The regulatory framework governing investment recommendations outside the ERISA context provides a useful analogy for understanding fiduciary prudence. Under both historical suitability standards and the Securities and Exchange Commission’s Regulation Best Interest framework, liability generally does not arise merely because a recommended investment subsequently underperforms. Investment outcomes alone do not establish misconduct. . Conversely, a fiduciary process may be deficient even if the selected investment performs well, if the fiduciary failed to consider material factors that should have informed the decision. Rather, the central inquiry is whether the recommendation was appropriate when made based upon the investor’s circumstances, objectives, and the information reasonably available at the time.

The same principle applies to ERISA fiduciary analysis. A fiduciary is not required to predict future investment performance or guarantee successful outcomes. ERISA does not impose liability merely because a selected investment later fails to achieve expectations. Instead, the inquiry focuses on whether the fiduciary employed a prudent process that considered material information and reasonably evaluated the investment’s role in advancing participant interests.

Accordingly, the critical question is not whether a particular investment product ultimately succeeds or fails. The question is whether the fiduciary possessed and considered sufficient information to make an informed decision consistent with the duties of loyalty and prudence. Based on my work with ERISA plaintiff attorneys, I believe we are going to see an increase claims focusing on whether a fiduciary’s decision-making process factored in terminal wealth. If nothing else, terminal wealth creates a material issue of fact, which should preclude dismissal of the action,

This distinction is particularly important in evaluating retirement income strategies and alternative investments. An annuity is not imprudent merely because it involves surrender of investment principal, just as an alternative investment is not imprudent merely because it involves complexity or reduced liquidity. The fiduciary obligation is to understand and evaluate the relevant economic tradeoffs before selecting the investment or strategy.

Terminal wealth analysis contributes to this process by providing fiduciaries with additional information concerning the participant’s likely economic position over time. It enables fiduciaries to evaluate not only income production or investment returns, but also capital preservation, liquidity, residual wealth, sequence risk, fees, and other factors affecting the participant’s ultimate retirement outcome.

The value of terminal wealth analysis, therefore, is not that it predicts outcomes with certainty. Its value is that it improves the quality of the fiduciary decision-making process by ensuring that material economic considerations are identified, evaluated, and weighed before the fiduciary acts.

I think there is also an important doctrinal parallel with ERISA litigation itself.

Courts frequently distinguish between:

  • a bad outcome resulting from a prudent process, and
  • a favorable outcome resulting from an imprudent process.

That is why the Supreme Court in cases such as Fiduciary Management Associates, Tibble, and Hughes focused heavily on the process: what information was considered, what alternatives were evaluated, what monitoring occurred, and whether fiduciaries acted consistently with their obligations.

The law does not demand clairvoyance. It demands disciplined decision-making based on adequate information.

The fiduciary is not required to know whether a participant will live long enough to realize mortality credits, whether markets will outperform expectations, or whether a particular alternative investment will exceed a benchmark. The fiduciary is required to understand the relevant tradeoffs, evaluate them objectively, and make decisions based on the best available information.

Terminal wealth is valuable not because it guarantees better outcomes, but because it helps create a better fiduciary process before outcomes are known.

Prudent plan sponsors will focus on the practical fiduciary takeaways from this post::

  • You are not required to predict the future.
  • You are required to make informed decisions using the right information.
  • Returns and income are important, but they are not the entire retirement outcome.
  • The question is whether the fiduciary process considers the participant’s complete financial picture.

Going Forward: Fiduciary Prudence Is About the Quality of the Decision-Making Process—Not Predicting the Future

Plan sponsors are not expected to predict markets, forecast interest rates, or know in advance which investment strategy will produce the highest return. ERISA does not require perfection. It requires a prudent process.

That distinction is vitally important and cannot be overemphasized..

In fiduciary decision-making, the critical question is not simply whether an investment ultimately performs well or poorly. The question is whether the fiduciary had and considered the information necessary to make an informed decision when the decision was made. Plan sponsors and other investment fiduciaries who do not factor in terminal wealth leave themselves vulnerable in ERISA litigation

Too often, retirement investment discussions focus primarily on two measurements:

• How much did the investment return?
• How much income did it produce?

Both are important. Neither tells the entire story.

Participants do not retire on returns alone. They retire on the wealth they have accumulated, preserved, and converted into retirement security.

That is why plan fiduciaries should consider the concept of terminal wealth—the participant’s overall economic position over the retirement horizon.

Terminal wealth analysis considers factors that directly affect retirement outcomes, including:

• preservation of capital;
• sequence-of-returns risk;
• liquidity and flexibility;
• fees and expenses;
• inflation impact;
• sustainable income;
• residual asset value; and
• the long-term consequences of investment decisions.

This does not mean that one investment product or strategy is always better than another. An annuity, an alternative investment, or a traditional portfolio may each serve an important role depending on participant needs and circumstances.

The fiduciary obligation is not to choose a particular product. The obligation is to understand the tradeoffs. A prudent fiduciary process asks:

“Have we considered all material information necessary to evaluate how this decision affects participants’ long-term financial security?”

Terminal wealth is not a replacement for traditional investment analysis. It is an additional lens that helps fiduciaries evaluate whether a strategy advances the ultimate objective of a retirement plan: helping participants achieve financial security.

Better information leads to better decisions. Better decisions are the foundation of fiduciary prudence.

For a LinkedIn audience of plan sponsors, I would probably use this as the lead post in a series rather than a single standalone piece. The natural follow-up posts would be:

  1. “Why investment returns alone do not measure retirement success.”
  2. “The fiduciary difference between income generation and wealth preservation.”
  3. “Evaluating annuities: guaranteed income versus preserved capital.”
  4. “Terminal wealth and the future of fiduciary decision-making.”

In closing, I will once again stress the key theme in this post:  fiduciary prudence is not about choosing the winning product; it is about creating a process capable of producing the best-informed decision for participants. Prudent investment fiduciaries recognize that fiduciary prudence and fiduciary liability are all about the quality of the fiduciary’s decisions.

The question is not whether a plan’s investment committee selected the “right” investment after the fact. The question is whether the committee had the right information before making the decision.

Fiduciaries cannot control outcomes or eliminate uncertainty, but they can control the quality of the process used to reach decisions affecting participants’ retirement security.

During a recent webcast with Kate McBride and Nevin Adams, one thing we all agreed on is that it is not a case that ,fiduciaries lack concern for participants. We agreed that plan sponsors need, and want, more and better educational opportunities. A recurring problem is that many fiduciary reviews naturally gravitate toward familiar measurements—performance, fees, benchmarks, and income—while potentially overlooking broader measures of retirement success.

Terminal wealth becomes valuable because it asks the question that participants ultimately care about:

“After all the investment decisions, distributions, fees, market cycles, and retirement years have passed, what financial position did this strategy actually create?”

That is a powerful fiduciary question, one that should always remind plan sponsors of their primary fiduciary duty –

Promoting the best interests of plan participants.

That is the common thread connecting ERISA’s duty of loyalty, the duty of prudence, participant disclosures, and terminal wealth analysis. The metric is secondary. The mission is primary.

© Copyright 2026 InvestSense, LLC. All rights reserved

This article is for informational purposes only and is neither designed nor intended to provide legal, investment, or other professional advice since such advice always requires consideration of individual circumstances. If legal, investment, or other professional assistance is needed, the services of an attorney or other qulified professional advisor should be sought.

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Fiduciary Prudence Protocols: Proactive Fiduciary Risk Mitigation Strategies For Plan Sponsors and Other Investment Fiduciaries

Posted on July 21, 2026 by jwatkins

James W. Watkins, III, J.D., CFP EmeritusTM, AWMA®
InvestSense, LLC


These protocols synthesize the fiduciary standards reflected in Supreme Court ERISA decisions and the Restatement (Third) of Trusts.

1. Loyalty Protocol

Every decision must be made solely in the interest of participants and beneficiaries.

  • Eliminate conflicts of interest.
  • Ignore employer, insurer, or service-provider interests.
  • Document why the decision benefits participants.

Authorities: ERISA §404(a)(1)(A); John H. Langbein; Restatement (Third) of Trusts §78.

2. Independent Investigation Protocol

No investment may be selected or retained without an independent investigation.

The fiduciary should:

  • identify reasonable alternatives;
  • evaluate risks and expected returns;
  • assess costs;
  • compare available investments using objective data.

Authorities: Donovan v. Bierwirth; Restatement (Third) of Trusts §90.

3. Risk-Return Protocol

Each investment must be expected to provide a return commensurate with its risk.

Questions include:

  • Does higher risk produce higher expected return?
  • If lower return, is risk materially reduced?
  • Is the investment economically justified?

This reflects the Restatement’s requirement of commensurate return.

4. Cost Efficiency Protocol

Every expense must be justified by measurable participant benefit.

Analyze:

  • expense ratios;
  • advisory fees;
  • insurance costs;
  • surrender charges;
  • transaction costs.

Higher costs require demonstrable value.

Authorities: Restatement (Third) of Trusts §90; Tibble v. Edison International.


5. Benchmark Protocol

Every investment must be benchmarked against meaningful alternatives.

Benchmarks should compare:

  • risk;
  • return;
  • volatility;
  • liquidity;
  • total cost;
  • terminal wealth.

Opaque investments require documentation explaining benchmark methodology.

6. Ongoing Monitoring Protocol

Prudence is continuous.

Review periodically:

  • performance;
  • fees;
  • benchmark results;
  • manager changes;
  • investment thesis.

Replace investments that no longer satisfy fiduciary standards.

Authority: Tibble v. Edison International.

7. Diversification Protocol

Evaluate each investment as part of the portfolio.

Avoid unnecessary concentration while ensuring diversification serves participants rather than marketing objectives.

Authority: Restatement (Third) of Trusts §90.

8. Documentation Protocol

Create a contemporaneous record showing:

  • information reviewed;
  • alternatives considered;
  • analyses performed;
  • expert advice received;
  • reasons for the decision.

Good documentation supports—but does not replace—a prudent decision.

9. Participant Outcome Protocol

Focus on economic outcomes, not merely process.

Evaluate:

  • retirement income;
  • wealth accumulation;
  • downside protection;
  • inflation-adjusted purchasing power;
  • terminal wealth.

A procedurally careful process cannot justify an economically imprudent result.

10. Disclosure Protocol

Participants should receive sufficient information to understand:

  • material risks;
  • fees;
  • conflicts;
  • limitations;
  • assumptions.

Material omissions undermine informed decision-making.

Authority: Restatement (Third) of Trusts §82.

11. Evidentiary Protocol

Before selecting specialized or alternative investments, retain evidence sufficient to demonstrate:

  • expected risk-adjusted returns;
  • benchmark validity;
  • valuation methodology;
  • liquidity characteristics;
  • cost justification.

Absent reliable evidence, prudence is difficult to establish.

12. Judicial Review Protocol

Assume every fiduciary decision will later be examined by a federal judge.

The record should enable the fiduciary to prove:

  • loyalty;
  • prudence;
  • objective investigation;
  • reasoned analysis;
  • continuous monitoring;
  • participant-focused decision-making.

Governing Supreme Court Principles

These protocols are consistent with key principles from:

  • Firestone Tire & Rubber Co. v. Bruch — ERISA fiduciaries are informed by trust law.
  • Fifth Third Bancorp v. Dudenhoeffer — Fiduciary decisions must satisfy ordinary standards of prudence.
  • Tibble v. Edison International — Fiduciaries have a continuing duty to monitor investments.
  • Hughes v. Northwestern University — Offering some prudent investments does not excuse retaining imprudent one.
  • Cunningham .v, Cornelss University (see Note below)

    13. Prohibited Transaction Protocol
  • Treat every transaction with a party in interest as presumptively prohibited unless a statutory exemption can be established.
  • Before approving the transaction, document:
    • necessity of the services;
    • reasonableness of compensation;
    • why the applicable §408 exemption is satisfied.

14. Burden-of-Proof Protocol

  • Maintain contemporaneous evidence sufficient to prove every claimed exemption.
  • Assume that if challenged, the fiduciary—not the participant—will bear the burden of establishing the exemption.
  • Preserve benchmarking, fee analyses, RFP materials, committee minutes, and expert evaluations supporting the transaction.

Together, these protocols provide a litigation-grade framework for evaluating fiduciary conduct under ERISA §404(a) and the Restatement (Third) of Trusts, emphasizing both procedural rigor and substantive economic prudence.

In terms of litigation and the burden of proof protocol, the recent Supreme Court decision in Cunningham v. Cornell Univrresity deserves special attention. Cunningham is especially valuable because it reinforces a broader procedural principle: where the evidence regarding prudence or statutory exemptions is uniquely within the fiduciary’s possession, ERISA does not require participants to negate those matters before discovery. That dovetails with a recurring argument that fiduciaries should be required to produce the benchmarking and analytical materials underlying their decisions once a plausible claim is stated. While Cunningham arose under §406 rather than §404, its allocation of pleading and proof burdens supports that procedural framework.

Notes
1. Donovan v. Bierwirth, 680 F.2d 263 (2d Cir. 1982).
2. Tibble v. Edison, 575 U.S. 523 (2015).
3. Firestone Tire & Rubber v. Bruch, 573 U.S. 409 (2014).
4..Fifth Third Bancorp v. Dudenhoeffer, 573 573 U.S. 409 (2014)
5. Hughes v. Northwestern University, 595 U.s. 170 (2022).
6. Cunningham v. Cornell University, 604 U.S. ____ (2025).

© Copyright 2026 InvestSense, LLC. All rights reserved.

This article is for informational purposes only and is neither designed nor intended to provide legal, investment, or other professional advice since such advice always requires consideration of individual circumstances. If legal, investment, or other professional assistance is needed, the services of an attorney or other qulified professional advisor should be sought.

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Quantifying Fiduciary Prudence, Part I: Artificial Intelligence as a Fiduciary Risk/Liability Mitigation Tool Under ERISA

Posted on July 3, 2026 by jwatkins

James W. Watkins, III, J.D., CFP EmeritusTM, AWMA®
InvestSense, LLC

May It Please the Court:

The question before this Court is not whether artificial intelligence should replace fiduciary judgment. It should not. The question is whether fiduciaries acting under the prudent expert standard imposed by the Employee Retirement Income Security Act of 1974 (“ERISA”) may appropriately employ advanced analytical technologies to better satisfy their duties of prudence, loyalty, and process. The answer is not merely yes—it is that modern fiduciary obligations increasingly counsel in favor of doing so.

At its core, ERISA is a process statute. Courts have repeatedly emphasized that fiduciary liability ordinarily turns not on investment outcomes, but on whether fiduciaries employed a reasoned, informed, and well-documented decision-making process, resulting in substantively prudent results as well. Artificial intelligence, when used as a decision-support tool rather than a decision-maker, directly enhances every component of that process.

The duty of prudence requires fiduciaries to 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.” That statutory language is inherently dynamic. It requires fiduciaries to employ those tools that reasonably prudent experts utilize as financial analysis evolves.

Just as fiduciaries once progressed from handwritten ledgers to spreadsheets, from manual performance calculations to institutional analytics, and from paper investment committees to sophisticated portfolio management systems, today’s fiduciaries may appropriately incorporate artificial intelligence into their analytical framework. The law does not freeze prudence in time. Prudence evolves with available methods that improve decision quality while preserving independent fiduciary judgment. Artificial intelligence provides precisely that advancement opportunity

First, AI dramatically improves the quality and completeness of cost-benefit analyses required for evaluating investment alternatives, including mutual funds. A prudent fiduciary must evaluate expense ratios, revenue sharing, trading costs, turnover, tracking error, risk-adjusted performance, manager consistency, benchmark deviations, asset growth, economies of scale, and qualitative operational considerations. Historically, assembling these data required substantial manual effort, increasing the likelihood that material factors might be overlooked.

Artificial intelligence enables fiduciaries to aggregate thousands of data points across multiple databases within minutes rather than weeks. It can identify statistically significant differences among investment alternatives, model fee reductions under varying asset assumptions, quantify long-term participant savings under alternative fund structures, and generate sensitivity analyses across numerous market conditions.

More importantly, AI creates a transparent analytical record. Rather than relying upon conclusory committee minutes stating that investments were “reviewed,” fiduciaries can preserve comprehensive documentation demonstrating precisely what factors were considered, what assumptions were utilized, what alternatives were modeled, and why one investment was reasonably selected over another. That documentation substantially mitigates litigation risk because courts evaluating fiduciary conduct consistently examine process rather than hindsight.

Second, artificial intelligence materially improves the evaluation of in-plan annuity options through sophisticated breakeven analysis. The selection of lifetime income products presents one of the most analytically complex decisions confronting retirement plan fiduciaries.

Participants differ significantly with respect to:

  • age,
  • health,
  • mortality expectations,
  • marital status,
  • inflation assumptions,
  • discount rates,
  • withdrawal behavior,
  • investment return expectations,
  • tax treatment,
  • survivor benefits,
  • liquidity preferences, and
  • longevity risk.

Traditional analyses frequently reduce these variables to simplistic averages. Artificial intelligence instead permits individualized scenario modeling across thousands—or even millions—of possible outcomes.

AI can instantly calculate breakeven ages under multiple market environments, compare systematic withdrawals against guaranteed lifetime income, perform Monte Carlo simulations incorporating stochastic investment returns, model inflation-adjusted purchasing power over decades, evaluate mortality assumptions under varying demographic characteristics, and quantify the economic value of longevity insurance embedded within annuity products.

These analyses do not dictate fiduciary decisions. Rather, they illuminate the consequences of alternative decisions with greater precision than previously possible. This distinction is legally critical.

ERISA requires informed judgment—not uninformed intuition. Artificial intelligence enhances information. The fiduciary retains judgment.

Third, AI significantly strengthens fiduciary oversight throughout the life cycle of investment monitoring. Prudent monitoring is not episodic. It is continuous.

Artificial intelligence can automatically detect:

  • significant fee changes,
  • benchmark underperformance,
  • manager style drift,
  • abnormal risk exposures,
  • unusual portfolio concentrations,
  • operational red flags,
  • regulatory developments,
  • market anomalies, and
  • emerging litigation involving service providers.

Instead of relying upon quarterly manual reviews, fiduciaries receive timely identification of issues requiring human attention. This improves—not replaces—fiduciary oversight.

Indeed, one of the principal criticisms raised in excessive-fee litigation is that fiduciaries failed to identify available lower-cost alternatives or failed to investigate changing circumstances. Artificial intelligence directly addresses those criticisms by systematically reviewing information that human committees might reasonably overlook because of volume, complexity, or resource limitations.

Fourth, AI substantially reduces fiduciary litigation risk through improved documentation. Experienced ERISA litigators understand that fiduciary cases frequently become battles over committee records. Years after decisions were made, plaintiffs attempt to reconstruct allegedly deficient processes from sparse meeting minutes.

Artificial intelligence can generate contemporaneous reports documenting:

  • the data reviewed;
  • the alternatives considered;
  • the assumptions employed;
  • sensitivity analyses performed;
  • quantitative comparisons generated;
  • qualitative factors evaluated; and
  • the rationale supporting committee recommendations.

This contemporaneous documentation provides objective evidence that fiduciaries discharged their obligations through a disciplined and informed process. Such evidence directly supports judicial findings of procedural prudence.

Opponents may argue that artificial intelligence creates new risks. Certainly it does. Any analytical tool may be misused. But those risks are manageable through traditional fiduciary safeguards.

  • Fiduciaries must validate the accuracy of the input data.
  • They must understand model assumption..
  • Fiduciaries must uhnderstand model assumptions.
  • They must question questionable inputs.
  • They must avoid algorithmic bias.
  • They must preserve independent judgment.

None of these obligations undermine AI’s utility. Rather, they reinforce that AI functions as an expert analytical assistant—not an autonomous fiduciary. Indeed, these safeguards mirror the obligations already imposed when fiduciaries retain investment consultants, actuaries, economists, accountants, and legal advisors.

ERISA has never prohibited reliance upon expert assistance. It requires prudent supervision of that assistance. Artificial intelligence fits comfortably within that established legal framework.

Perhaps most importantly, declining to employ available analytical technologies may itself become evidence of imprudence as such technologies become standard within institutional investment practice.

The prudent expert standard is comparative. It asks what similarly situated fiduciaries exercising professional competence would reasonably do under contemporary conditions.

If sophisticated institutional fiduciaries routinely employ AI-enhanced analytics to evaluate fees, benchmark investments, conduct breakeven analyses, identify conflicts, and monitor plan investments, then refusing to utilize comparable tools without reasonable justification may itself invite judicial scrutiny.

Technology changes. The standard of prudence evolves alongside it.

The legal duty remains constant: informed, careful, loyal decision-making.Artificial intelligence advances—not diminishes—that objective.

Finally, this Court should recognize the broader policy implications. ERISA exists to protect retirement security.

Artificial intelligence enables fiduciaries to evaluate more investment options, analyze more data, identify lower-cost alternatives, improve participant outcomes, reduce administrative inefficiencies, strengthen documentation, and better defend prudent decisions when challenged.

Every dollar saved through improved fee analysis compounds for participants over decades.

Every more accurate annuity evaluation enhances retirement income security.

Every improved monitoring system reduces the likelihood that imprudent investments remain undiscovered. These are not theoretical benefits. They are measurable improvements to fiduciary governance.

The law has never demanded that fiduciaries ignore superior methods of analysisIt has demanded precisely the opposite.

Artificial intelligence is neither a substitute for fiduciary judgment nor an abdication of fiduciary responsibility. It is an instrument through which prudent fiduciaries may more faithfully discharge the duties Congress imposed under ERISA. When employed responsibly—with transparency, human oversight, documented assumptions, independent judgment, and rigorous validation—artificial intelligence strengthens every element of fiduciary process that ERISA seeks to protect.

Accordingly, the courts should recognize that the prudent use of artificial intelligence is fully consistent with ERISA’s duties of prudence and loyalty and that, in appropriate circumstances, its thoughtful implementation materially mitigates fiduciary risk while enhancing the quality, transparency, and defensibility of fiduciary decision-making.

ARGUMENT

I. ERISA’S DUTY OF PRUDENCE REQUIRES FIDUCIARIES TO EMPLOY REASONABLY AVAILABLE ANALYTICAL TOOLS THAT ENHANCE THE QUALITY OF THEIR DECISION-MAKING PROCESS.

ERISA’s fiduciary standard, as set out in Section 404(a)(1)(B), requires fiduciaries to discharge their duties

“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….”

29 U.S.C. § 1104(a)(1)(B).

Congress deliberately chose language that evolves with professional practice. The phrase “under the circumstances then prevailing” rejects a static conception of fiduciary conduct. Prudence is measured according to contemporary standards of professional practice—not by reference to obsolete methods of analysis.

The Supreme Court has repeatedly emphasized that ERISA focuses on fiduciary process rather than investment outcomes. In Tibble v. Edison International, the Court reaffirmed that fiduciaries possess a continuing duty to monitor plan investments and remove imprudent options. That duty derives from the common law of trusts and requires an ongoing investigation into whether plan investments remain appropriate.

Likewise, in Hughes v. Northwestern University, the Court rejected the proposition that offering some prudent investment options excuses imprudent fiduciary conduct elsewhere within a retirement plan. Instead, fiduciaries must continuously engage in a reasoned evaluation of every investment alternative available to participants.

Similarly, Fifth Third Bancorp v. Dudenhoeffer reaffirmed that fiduciary prudence turns upon objective reasonableness informed by the circumstances confronting fiduciaries at the time decisions are made—not with hindsight.

These decisions collectively establish three propositions relevant here.

First, fiduciary liability ordinarily turns upon process., and the substantive prudence of sais process

Second, fiduciary process must be informed.

Third, fiduciary process must evolve alongside prevailing professional standards.

Artificial intelligence advances each of these principles. The technology neither replaces fiduciary judgment nor alters the statutory allocation of responsibility. Rather, AI functions as an analytical instrument that expands the quantity and quality of information available before fiduciaries exercise independent judgment.

Courts have never required fiduciaries to perform investment analysis using antiquated methods. To the contrary, the prudent expert standard presumes that fiduciaries will employ analytical techniques reasonably accepted within institutional investment management.

The history of fiduciary practice illustrates this principle. Fiduciaries once relied upon handwritten calculations. They later adopted computerized accounting systems, institutional portfolio analytics, Monte Carlo simulations, sophisticated actuarial software, quantitative optimization models, and electronic benchmarking platforms. No court suggested that adoption of these technologies constituted an abdication of fiduciary responsibility. Instead, each represented an improvement in the quality of fiduciary investigation.

Artificial intelligence represents the next logical progression. The governing legal principle remains unchanged. Technology informs judgment. Technology does not replace judgment. That distinction answers the principal criticism advanced by opponents of AI-assisted fiduciary decision-making.

ERISA prohibits delegation of discretionary fiduciary responsibility. It does not prohibit reliance upon sophisticated analytical assistance.

Indeed, fiduciaries routinely depend upon investment consultants, economists, actuaries, accountants, legal counsel, and recordkeepers. The common law of trusts has always recognized that prudent fiduciaries may rely upon experts possessing specialized knowledge beyond their own expertise, provided that fiduciaries independently evaluate those recommendations.

Artificial intelligence occupies precisely the same role. The fiduciary remains responsible for determining what questions should be asked.The AI system merely accelerates the process of answering them.

II. AI SUBSTANTIALLY IMPROVES COST-BENEFIT ANALYSES REQUIRED FOR PRUDENT SELECTION AND MONITORING OF MUTUAL FUNDS.

Modern excessive-fee litigation demonstrates that fiduciary disputes frequently concern whether plan committees adequately evaluated investment costs relative to expected benefits.

Meaningful cost-benefit analysis requires simultaneous evaluation of dozens of variables, including:

  • expense ratios;
  • institutional share class availability;
  • revenue-sharing arrangements;
  • securities lending income;
  • transaction costs;
  • benchmark-relative performance;
  • tracking error;
  • downside risk;
  • manager tenure;
  • portfolio turnover;
  • asset growth;
  • economies of scale;
  • style consistency;
  • liquidity;
  • operational risks; and
  • comparable alternatives available within the marketplace.

Historically, assembling these data required weeks of manual effort involving multiple consultants and numerous proprietary databases. Artificial intelligence transforms that process.

Large language models integrated with structured financial databases can organize thousands of investment characteristics into comparative matrices within minutes. Machine-learning systems can identify statistically meaningful outliers, recognize hidden correlations between fees and long-term performance, detect persistent style drift, summarize historical manager behavior, and quantify participant-level impacts associated with alternative investment selections.

Perhaps more importantly, AI permits fiduciaries to perform sensitivity analyses that previously would have been prohibitively expensive. Rather than asking whether Fund A marginally outperformed Fund B, fiduciaries can model thousands of scenarios examining the effects of varying contribution rates, market volatility, participant demographics, projected asset growth, inflation, and fee reductions over decades.

Such analyses directly advance ERISA’s objective of protecting retirement assets through informed fiduciary decision-making. The economic consequences are substantial.

Even modest reductions in annual investment expenses frequently compound into significant increases in participant retirement balances over thirty or forty years. AI enables fiduciaries to identify those opportunities with greater precision while simultaneously documenting the analytical process supporting their conclusions.

Accordingly, AI strengthens—not weakens—the fiduciary process required under § 404(a).

III. AI MATERIALly ENHANCES BREAKEVEN ANALYSES NECESSARY TO EVALUATE IN-PLAN ANNUITIES.

Lifetime income products present some of the most analytically demanding questions confronting retirement plan fiduciaries. Selecting an in-plan annuity requires simultaneous evaluation of actuarial assumptions, mortality projections, insurer solvency, participant demographics, inflation expectations, withdrawal behavior, investment opportunity costs, liquidity considerations, and longevity risk.

No single participant experiences identical circumstances. Consequently, generalized averages often obscure the true economic value of guaranteed lifetime income.

Artificial intelligence permits fiduciaries to move beyond simplistic comparisons by generating individualized breakeven analyses under thousands of possible future economic environments.

AI-driven models can calculate:

  • breakeven ages under varying discount rates;
  • inflation-adjusted purchasing power;
  • expected present value of guaranteed income streams;
  • mortality-adjusted benefit distributions;
  • comparative systematic withdrawal outcomes;
  • Monte Carlo simulations of market returns;
  • sequence-of-returns risk;
  • longevity insurance value; and
  • survivor-benefit scenarios.

These analyses illuminate—not dictate—the fiduciary decision. They enable fiduciaries to understand when an annuity provides meaningful value relative to self-managed withdrawals and when alternative investment strategies may better serve participants.

By making complex actuarial comparisons more transparent, AI assists fiduciaries in satisfying ERISA’s requirement that decisions be based on a prudent investigation rather than intuition or incomplete information.

IV. PRUDENT FIDUCIARY ANALYSIS SHOULD EMPHASIZE RISK-ADJUSTED ECONOMIC VALUE RATHER THAN NOMINAL FEES OR NOMINAL RETURNS, AND ARTIFICIAL INTELLIGENCE FACILITATES THE USE OF THE ACTIVE MANAGEMENT VALUE RATIO.

One of the recurring deficiencies in excessive-fee litigation is the tendency to evaluate investment alternatives through simplistic comparisons of expense ratios or nominal historical returns. Such comparisons are analytically incomplete because they fail to account for the economic value, if any, generated by active management after adjusting for the risks assumed in producing those returns. ERISA requires considerably more.

The statutory duty of prudence demands that fiduciaries evaluate investments based upon all material economic considerations reasonably available at the time of the decision. Neither the text of ERISA nor the common law of trusts suggests that fiduciaries satisfy this obligation by selecting the least expensive investment available or by identifying the investment exhibiting the highest historical return. Rather, fiduciaries must determine whether participants receive sufficient value to justify the costs incurred. That inquiry necessarily requires measuring incremental value, not merely incremental cost.

A. Nominal Fee Comparisons Are Economically Incomplete.

An actively managed mutual fund charging a higher expense ratio than an index fund is not imprudent merely because it costs more. Conversely, a low-cost fund is not necessarily prudent simply because its expense ratio is lower. The relevant question is whether the additional fees purchase sufficient incremental economic value after accounting for risk.

Traditional comparisons often examine only:

  • expense ratio;
  • one-, three-, five-, or ten-year returns;
  • benchmark performance; and
  • percentile rankings.

Those measures, standing alone, provide an incomplete assessment of participant value because they ignore differences in systematic risk, factor exposures, downside volatility, correlation with existing plan investments, diversification benefits, and persistence of manager skill.

Two funds producing identical nominal returns may contribute dramatically different economic value to a diversified retirement portfolio. Likewise, two funds charging identical fees may generate materially different levels of participant welfare depending upon their marginal contribution to overall portfolio efficiency. Accordingly, prudent fiduciary analysis should focus upon risk-adjusted incremental value, rather than isolated comparisons of cost or return.

B. The Active Management Value Ratio Provides a More Complete Measure of Fiduciary Value.

The proposed Active Management Value Ratio (“AMVR”) metric provides precisely this analytical framework.

Rather than asking whether active management is simply “worth the fee,” the AMVR evaluates whether the incremental risk-adjusted return attributable to active management exceeds its incremental cost after accounting for the fund’s correlation with available alternatives and its contribution to total portfolio efficiency.

Conceptually, the metric may be expressed as:

Active Management Value Ratio = Risk-Adjusted Incremental Economic Benefit ÷ Incremental Active Management Cost

The numerator reflects value added after adjusting for systematic and idiosyncratic risks, correlation effects, diversification benefits, and other relevant portfolio characteristics.

The denominator represents the additional costs incurred by selecting active management instead of the most appropriate passive or lower-cost alternative.Unlike conventional fee comparisons, the AMVR recognizes that active management may create value through multiple channels, including:

  • positive risk-adjusted alpha;
  • lower downside capture during market declines;
  • reduced portfolio volatility through imperfect correlation;
  • enhanced diversification;
  • superior tax efficiency where applicable;
  • improved liquidity management;
  • factor diversification; and
  • dynamic risk management not reflected in nominal return statistics.

Conversely, the AMVR appropriately identifies situations in which higher fees purchase little or no incremental economic benefit despite attractive nominal returns. The resulting analysis better aligns fiduciary evaluation with modern principles of portfolio theory.

C. Artificial Intelligence Makes Sophisticated AMVR Analysis Practical for Fiduciary Committees.

Historically, analyses incorporating correlation matrices, multi-factor risk models, downside-risk measures, Monte Carlo simulations, tracking-error decomposition, and incremental portfolio optimization required specialized quantitative expertise beyond the resources of many retirement plan committees. Artificial intelligence substantially changes that reality.

Modern AI systems can rapidly integrate data from portfolio analytics, benchmark databases, factor models, historical return series, and plan-specific investment menus to calculate the AMVR across numerous investment alternatives.

AI-assisted analysis enables fiduciaries to:

  • estimate incremental risk-adjusted alpha;
  • calculate marginal contributions to portfolio variance;
  • evaluate changing correlation structures during stressed markets;
  • estimate diversification benefits across existing plan investment menus;
  • compare active and passive alternatives under multiple economic scenarios;
  • perform sensitivity analyses using varying assumptions regarding fees, volatility, inflation, and participant behavior; and
  • document every analytical assumption supporting the committee’s conclusions.

What once required weeks of quantitative modeling can now be completed within minutes while producing a transparent record suitable for fiduciary review and judicial examination.Importantly, AI does not determine whether a fund should remain in the plan. Rather, AI supplies a more complete economic analysis from which fiduciaries exercise independent judgment.

D. AMVR Better Reflects ERISA’s Process-Oriented Standard of Prudence.

ERISA requires a prudent investigation—not predetermined investment outcomes. The AMVR strengthens fiduciary process because it requires committees to evaluate both sides of the economic equation:

  1. What additional costs are participants paying?
  2. What measurable incremental benefits are participants receiving?
  3. Are those benefits sufficient after adjusting for the risks undertaken to obtain them?
  4. Does the investment improve the efficiency of the participant’s overall retirement portfolio rather than merely outperforming a benchmark in isolation?

These are precisely the types of questions that prudent experts increasingly ask when evaluating institutional investment strategies. By encouraging fiduciaries to assess incremental costs against incremental, correlation-adjusted, risk-adjusted benefits, the AMVR advances ERISA’s twin objectives of protecting retirement assets and promoting informed fiduciary decision-making.

E. Courts Should Encourage Analytical Frameworks That Improve the Quality of Fiduciary Process.

Nothing in ERISA prescribes a particular quantitative methodology for evaluating mutual funds. That flexibility is deliberate. It permits fiduciaries to adopt more sophisticated analytical techniques as finance evolves.

The AMVR exemplifies such an evolution. Rather than replacing established fiduciary principles, it operationalizes them. It transforms the abstract obligation to conduct a prudent investigation into a disciplined, transparent, economically rigorous methodology capable of objective review.

Artificial intelligence makes widespread implementation of this methodology feasible by substantially reducing the cost, time, and technical complexity historically associated with advanced portfolio analytics.

As AI continues to democratize institutional-quality financial analysis, fiduciaries can no longer be expected to rely exclusively upon nominal expense ratios and historical returns when materially superior analytical methods are readily available. The prudent expert standard is not satisfied by comparing prices alone. It requires evaluating value. The Active Management Value Ratio provides a coherent framework for doing precisely that, and AI provides the practical means by which fiduciaries can employ that framework consistently, transparently, and at reasonable cost.

Accordingly, fiduciaries who incorporate AI-assisted AMVR analyses into their investment review process materially strengthen both the substance and the evidentiary record of their fiduciary deliberations, thereby reducing litigation risk while improving participant outcomes.

V. THE ACTIVE MANAGEMENT VALUE RATIO DERIVES ITS FIDUCIARY UTILITY FROM COMBINING THE MODIGLIANI MEASURE OF RISK-ADJUSTED RETURN WITH MILLER’S ACTIVE EXPENSE RATIO TO PRODUCE A COMPREHENSIVE ECONOMIC ASSESSMENT OF INCREMENTAL VALUE.

The ultimate objective of fiduciary analysis is not to identify the highest-performing investment in isolation. It is to determine whether an investment contributes sufficient economic value to justify its incremental costs within the context of a diversified retirement portfolio. The Active Management Value Ratio (“AMVR”) advances that objective by integrating two complementary analytical components.

First, it measures the incremental economic benefit produced by active management through a risk-adjusted return metric that reflects the investment’s contribution after accounting for the risks undertaken. Second, it measures the true incremental cost of obtaining that benefit by adjusting expenses to reflect the extent to which active management actually differs from lower-cost alternatives.

Together, these measurements transform the fiduciary inquiry from one focused on isolated performance into one centered on participant value.

A. The Modigliani Measure Provides an Economically Intuitive Measure of Incremental Risk-Adjusted Return.

Traditional performance measures frequently present fiduciaries with statistics that are difficult to interpret in economic terms. Measures such as the Sharpe Ratio, Information Ratio, and alpha are valuable analytical tools, but they often express performance in units that lack direct economic meaning for committee members who must ultimately exercise fiduciary judgment.

The Modigliani risk-adjusted performance measure (commonly referred to as the M² Measure) addresses this limitation. Rather than expressing performance as an abstract ratio, the Modigliani Measure converts risk-adjusted performance into return units directly comparable to benchmark returns. By expressing performance as an equivalent return after normalizing portfolio risk, the measure allows fiduciaries to evaluate the economic value generated by active management in terms readily understood by investment committees and reviewing courts alike.

Within the AMVR framework, the Modigliani Measure serves as the numerator because it estimates the incremental return attributable to active management after controlling for differences in portfolio risk. This approach recognizes that fiduciaries should reward managers only for generating genuine economic value—not merely for assuming greater volatility.

Consequently, two actively managed funds producing identical nominal returns may exhibit materially different incremental value once differences in systematic and total portfolio risk are properly incorporated.

Using the Modigliani Measure therefore aligns fiduciary analysis with ERISA’s requirement that investment decisions be based upon careful consideration of all relevant economic factors rather than superficial performance rankings.

B. Miller’s Active Expense Ratio Better Measures the True Incremental Cost of Active Management.

The denominator of the AMVR likewise requires refinement.

Expense ratios alone frequently overstate the economic cost of active management because they assume that every basis point of additional expense represents active investment decision-making. That assumption is rarely correct.

Many actively managed funds maintain substantial overlap with passive benchmarks while charging materially higher fees. Conversely, genuinely differentiated active strategies may justify a greater proportion of their expenses because they provide investment characteristics unavailable through passive alternatives.

Miller’s Active Expense Ratio (“AER”) addresses this distinction by adjusting the apparent incremental cost of active management to reflect the degree of active differentiation and correlation between the active portfolio and its relevant alternatives. Rather than measuring cost in isolation, the AER estimates the effective price participants pay for economically meaningful active management.

As correlation between an actively managed portfolio and its passive benchmark approaches unity, the incremental value of paying active management fees generally diminishes, and the effective active expense correspondingly increases. Conversely, where an active strategy provides genuinely differentiated exposures that improve portfolio efficiency, diversification, or downside protection, the adjusted active expense more accurately reflects the true economic cost of obtaining those benefits.

The result is a denominator that better captures what participants actually purchase when paying for active management.

C. The Combination of the Modigliani Measure and Active Expense Ratio Produces a Fiduciary Decision Metric Rather Than a Mere Performance Statistic.

Standing alone, neither performance metrics nor fee metrics fully answer the fiduciary question presented by ERISA.

Performance measures evaluate returns. Fee measures evaluate costs. Neither independently evaluates value.

The AMVR bridges this analytical gap by combining:

  • incremental risk-adjusted economic benefit, measured through the Modigliani Measure; and
  • incremental correlation-adjusted economic cost, measured through Miller’s Active Expense Ratio.

The resulting ratio expresses a concept directly relevant to fiduciary decision-making:

How much incremental, risk-adjusted participant value is produced for every incremental unit of economically meaningful active-management cost?

That inquiry corresponds closely to the economic substance of ERISA’s prudence requirement.

Prudent fiduciaries are not obligated to minimize expenses irrespective of value. Nor are they obligated to maximize returns irrespective of risk.

Rather, they must evaluate whether participant resources are expended in a manner reasonably calculated to improve retirement outcomes. The AMVR directly measures that relationship.

D. Artificial Intelligence Enables Routine Calculation of Metrics That Historically Were Impractical.

Although the Modigliani Measure and the Active Expense Ratio each rely upon well-established principles of financial economics, integrating both into routine fiduciary analysis historically required significant computational effort. Artificial intelligence largely eliminates those practical barriers.

Modern analytical systems can automatically calculate risk-adjusted returns, estimate correlation matrices, perform factor decompositions, normalize volatility, estimate effective active costs, conduct scenario analyses, and update these calculations continuously as market conditions evolve.

AI also enhances transparency by documenting every input, assumption, calculation, and sensitivity analysis underlying the resulting AMVR. This documentation materially strengthens the fiduciary record.

Rather than merely demonstrating that investment committees reviewed historical returns and expense ratios, fiduciaries can establish that they evaluated the complete economic relationship among incremental return, incremental risk, incremental cost, and portfolio diversification.

Such documentation is especially valuable in litigation, where courts consistently examine the quality and rigor of fiduciary process.

E. Because the AMVR Measures Fiduciary Value Rather Than Investment Performance Alone, It Better Serves ERISA’s Objectives.

Perhaps the most significant contribution of the AMVR is conceptual rather than computational. Its purpose is not to identify “winning” mutual funds.

Its purpose is to assist fiduciaries in determining whether participants receive sufficient incremental economic value to justify the incremental resources devoted to active management. That distinction is fundamental.

Investment managers compete on performance. Fiduciaries must evaluate value.

Performance statistics answer the former question. The AMVR answers the latter.

Accordingly, by integrating the Modigliani Measure’s economically intuitive assessment of incremental risk-adjusted return with Miller’s Active Expense Ratio’s economically realistic assessment of incremental active-management cost, the AMVR becomes a fiduciary decision metric uniquely aligned with ERISA’s emphasis on informed, reasoned, and economically rational decision-making.

As artificial intelligence makes these calculations both practical and transparent, fiduciaries possess an unprecedented opportunity to replace simplistic comparisons of nominal fees and historical returns with a disciplined methodology that better reflects the economic interests of retirement plan participants and beneficiaries. Courts evaluating fiduciary prudence should therefore regard the use of such integrated analytical frameworks as evidence of a robust and well-informed decision-making process, rather than as mere reliance on sophisticated performance statistics.

Notes
1. 29 U.S.C.A. Section 1104(a)B)(1)(B).
2 .Ibid.
3. Tibble v. Edison, 575 U.S. 523 (2015)..
4. Hughes v. Northwestern University, 595 U.s. 170 (2022.)..
5. Fifth Third Bancorp v. Dudenhoeffer, 573 573 U.S. 409 (2014).

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May It Please the Court: Closing Argument On Fiduciary Duty of Disclosure Under ERISA Section 404(a) and Section 78(3) of the Restatement (Third) of Trusts

Posted on June 23, 2026 by jwatkins

James W. Watkins, III, J.D., CFP EmeritusTM, AWMA®
InvestSense, LLC

May it please the Court:

This case concerns a fundamental proposition that predates ERISA, predates modern securities law, and lies at the very heart of the law of trusts: a fiduciary cannot withhold material information from those to whom fiduciary duties are owed.

The issue before this Court is not whether a fiduciary acted with subjective good intentions, nor whether the fiduciary followed internal procedures, documented meetings, or retained consultants. The issue is whether fiduciaries discharged their affirmative duty of loyalty and disclosure by providing participants the information necessary to protect their own interests.

The answer is found in the law of trusts itself.

I. The Restatement Recognizes an Affirmative Duty to Disclose Material Information

Section 78(3) of the Restatement (Third) of Trusts1 provides that:

“Except in discrete circumstances, a trustee has a duty to the beneficiaries to deal fairly and to communicate to the beneficiary material facts affecting the beneficiary’s interest which the trustee knows or should know the beneficiary needs to know for the protection of the beneficiary’s interests.”

This rule is neither novel nor aspirational. It represents centuries of trust law recognizing that loyalty requires candor. A fiduciary who possesses material information affecting a beneficiary’s interests cannot remain silent merely because the beneficiary failed to ask the correct question.

ERISA expressly incorporates the common law of trusts as its interpretive foundation. The Supreme Court has repeatedly instructed that courts must look to trust law in defining the content of fiduciary duties. See, e.g., ERISA cases such as Varity Corp. v. Howe2 and Tibble v. Edison International.3

The Restatement’s duty to disclose therefore supplies an essential component of ERISA’s duties of loyalty and prudence.

II. “Material” Information Must Carry Its Established Legal Meaning

The Restatement does not define materiality in a vacuum. The concept has long possessed an established legal meaning.

The Supreme Court’s securities decisions provide the most developed and widely accepted articulation of materiality in TSC Industries. Inc. v. Northway, Inc.4 The Court held that information is material if there exists:

“a substantial likelihood that a reasonable investor would consider it important.”

The Court further explained that material information is that which would have significantly altered the “total mix” of information available.

That standard was reaffirmed in Basic, Inc. v. Levinson5, which rejected both excessively narrow and excessively expansive definitions of materiality.

Although these cases arose under the securities laws, the underlying principle is universal. Materiality concerns information sufficiently important that a reasonable person would regard it as significant in making decisions affecting his or her economic interests.

ERISA participants make decisions regarding contributions, investments, rollovers, distributions, retirement timing, and benefit elections. The same reasonable-investor framework therefore provides the most logical and legally coherent standard for determining what information fiduciaries must disclose.

III. The “Knew or Should Have Known” Standard Imposes an Objective Duty

Section 78(3) is equally important because it rejects a purely subjective standard.

A fiduciary’s duty extends to information the fiduciary “knew or should have known.” This language imposes an objective obligation.

ERISA fiduciaries cannot avoid liability by remaining deliberately uninformed, by failing to investigate, or by compartmentalizing information among committees, consultants, and service providers. A fiduciary charged with managing retirement assets must exercise the diligence necessary to discover material information affecting participants’ interests.

This principle parallels ERISA’s prudent-investigation requirement recognized in decisions such as:

  • Donovan v. Bierwirth6
  • Tibble v. Edison International7
  • Hughes v. Northwestern University8

A fiduciary cannot disclose information it never sought to obtain. Thus, the duties of prudence and disclosure operate together. The duty to investigate supplies the knowledge that the duty to disclose requires.

IV. Disclosure Is an Expression of Loyalty

The duty of loyalty demands more than the avoidance of self-dealing. A fiduciary acts loyally only when it places the beneficiary’s interests first. That obligation necessarily includes furnishing participants with information necessary to protect those interests.

Silence can itself constitute disloyal conduct. The Supreme Court recognized this principle in Varity Corp. v. Howe9, holding that fiduciaries may not materially mislead plan participants when communicating about plan benefits and participant interests.

A partial disclosure that omits material facts may be just as misleading as an outright falsehood. If fiduciaries know—or should know—that participants require certain information to protect their retirement interests, Section 78(3) requires disclosure.

V. Material Information in the ERISA Context

Material information may include:

  • Significant investment risks.
  • Conflicts of interest.
  • Revenue-sharing arrangements.
  • Material fees and expenses.
  • Limitations of investment products.
  • Information concerning fiduciary investigations.
  • Known risks affecting retirement outcomes.
  • Information bearing on the prudence of investment options.
  • Facts necessary to evaluate the security of promised benefits.

The relevant inquiry is straightforward:

Would a reasonable participant consider the information important in making decisions concerning retirement assets or benefits?

If the answer is yes, the information is material.

VI. Procedural Formalities Cannot Substitute for Disclosure

The EBSA’s current position notwithstanding, a fiduciary cannot satisfy its obligations merely by conducting meetings, retaining consultants, or creating documentation. A flawless process that withholds material information from participants remains inconsistent with fiduciary principles.

Section 78(3) recognizes that beneficiaries frequently suffer from informational asymmetry. Fiduciaries possess information, expertise, and access that participants lack. The law therefore places the burden upon the fiduciary—not the beneficiary—to communicate material facts.

This principle is particularly important in defined contribution plans, where participants increasingly bear investment risks and retirement outcomes depend heavily upon information known by fiduciaries and service providers.

Conclusion

Section 78(3) of the Restatement (Third) of Trusts establishes an affirmative fiduciary duty to disclose material information that fiduciaries knew or should have known beneficiaries needed to protect their interests.

Materiality should be evaluated using the objective standards articulated by the Supreme Court in TSC Industries and Basic: whether there exists a substantial likelihood that a reasonable participant would consider the information important, and whether disclosure would significantly alter the total mix of information available.

ERISA’s trust-law foundations compel this result.

The duty of loyalty requires candor.

The duty of prudence requires investigation.

The duty of disclosure requires communication.

Together, these principles ensure that retirement plan participants are not left to navigate critical financial decisions in informational darkness while fiduciaries possess material facts affecting their interests.

The law of trusts does not permit such silence. ERISA does not permit such silence. And this Court should not permit such silence.

The Fiduciary Duty of Disclosure Applied to In-Plan Annuities

The foregoing principles become particularly significant when applied to in-plan annuities because the fiduciary disclosure obligation extends not merely to the existence of a guaranteed lifetime income feature, but to all material facts that a fiduciary knew or should have known that participants would need to protect their retirement interests.

If a fiduciary offers an in-plan annuity while possessing—or while reasonably being expected to possess—information indicating that many participants are unlikely to achieve economic breakeven, such information may constitute material information under both Section 78(3) and ERISA’s fiduciary standards.

VII. In-Plan Annuities and the Duty to Disclose Material Information

In-plan annuities present a classic case of informational asymmetry.

The plan sponsor, fiduciary committee, consultants, insurers, and recordkeepers generally possess sophisticated actuarial, financial, and mortality information that the average participant neither possesses nor can independently obtain.

Participants frequently hear only the appealing phrase:

“Guaranteed income for life.”

However, Section 78(3) requires disclosure of material facts necessary for participants to protect their interests. That duty extends beyond marketing descriptions.

A fiduciary that knows, or should know, that certain economic characteristics materially affect the participant’s decision must disclose those characteristics. Such information may include:

  • Expected breakeven ages.
  • Present-value losses associated with annuitization.
  • Mortality probabilities.
  • The likelihood of recovering principal.
  • The cost of optional death-benefit riders.
  • Inflation effects.
  • Opportunity costs.
  • The economic consequences of irrevocable elections.

These are not peripheral considerations. They are material information that central to the participant’s decision. They are necessary to satisfy ERISA Section 404(a)’s requirement that a plan sponsor provide a plan particiapnt with “sufficient information to make an informaed decision.”

VIII. Materiality Under the Supreme Court Standard

Under the materiality standard established in TSC Industries and Basic, information is material if there is a substantial likelihood that a reasonable participant would consider it important in making a retirement decision.

Few facts could be more important to a reasonable participant than:

  • The probability of living long enough to break even.
  • The present-value reduction required to purchase lifetime guarantees.
  • The possibility that premature death results in forfeiture of principal.
  • The fact that principal protection often requires additional riders and additional costs.

If disclosure of these facts would significantly alter the “total mix” of information available to the participant, they are material as a matter of law.

A participant who hears only that an annuity provides “guaranteed income for life” receives an incomplete picture if the participant is not informed that actuarial probabilities may indicate a substantial likelihood that the participant will never recover the value of the premium transferred to the insurer.

IX. Breakeven Analysis as Material Information

A properly prepared breakeven analysis generally incorporates:

  1. Present value of future payments.
  2. Mortality probabilities.
  3. Time value of money.
  4. Inflation effects.
  5. Opportunity costs.
  6. Probability of principal recovery.

The present-value analysis is particularly important because a dollar received twenty years in the future is worth substantially less than a dollar retained today. The mortality analysis is equally important because the economic value of an income annuity depends heavily upon surviving beyond the actuarial breakeven age.

The mathematical relationship may be illustrated as follows:

$

%

PMT is starting amount; r is rate; n is number of periods.

When mortality probabilities are incorporated into the present-value calculation, many participants may discover that:

  • They must survive substantially beyond normal life expectancy to realize positive economic value.
  • They face a meaningful probability of dying before recovering their principal.
  • Their heirs may receive little or nothing absent additional riders.
  • Riders designed to preserve principal often reduce income and increase costs.

These facts directly affect the participant’s economic decision. Therefore, these are material facts that are required to be disclosed to a plan’s particiapnts.

A reasonable participant might decide differently if informed that actuarial analysis indicates only a modest probability of achieving an economic breakeven, of recovering their original presence and additional retirement income payments. To quote Mark Twain, “I’m not so concerned about the income ON my money as I am the return OF my money.”

X. The “Knew or Should Have Known” Standard

Section 78(3) imposes an objective duty of disclosure. Plan fiduciaries selecting in-plan annuities frequently retain severeal types of experts, including, but not limited to,:

  • Attorneys.
  • Fiducairy risk management consultants.
  • Actuaries.
  • Insurance consultants.
  • Investment consultants.
  • Recordkeepers.
  • Insurance carriers.

These parties routinely possess mortality assumptions, pricing models, payout factors, and actuarial analyses.

A fiduciary therefore cannot plausibly claim ignorance of facts that reasonably should have been investigated during the annuity selection process. If a prudent investigation would reveal that many participants face unfavorable breakeven probabilities, the fiduciary “should have known” those facts. Once known, or reasonably knowable, Section 78(3) requires disclosure if those facts are material to participant decision-making.

XI. The Absence of Principal Protection

Many immediate and deferred income annuities require irrevocable annuitization.

The participant exchanges a liquid asset for a stream of payments contingent upon survival. Without refund features or death-benefit riders:

  • Remaining principal may be forfeited.
  • Beneficiaries may receive nothing.
  • The insurer retains the remaining economic value.

The availability of principal protection often requires:

  • Period-certain guarantees.
  • Refund provisions.
  • Death-benefit riders.

These protections frequently reduce monthly income or increase costs. As both the DOL and GAO have noted, over a twenty year peroid, each additional 1% in fees/costs reduces an investor’s end-return by approximately 17%.10 Thus the economic tradeoff between income guarantees and principal protection is itself material information.

A participant may reasonably conclude that a lower-yielding bond ladder, Treasury portfolio, CDs or systematic withdrawal strategy better satisfies their objectives if informed of these tradeoffs.

When Income Is Not Enough: Why the Continued Inclusion of In-Plan Annuities May Breach ERISA Duties When Compared to Capital-Preserving Income Alternatives and Strategies
In-Plan Annuities and Fiduciary Risk Management: Guaranteed Income vs. Commensurate Return

XIII. The Speculative Nature of Mortality Credits

Proponents of annuities frequently argue that “mortality credits” justify the economic value of lifetime income products. The theory is that individuals who die earlier than expected subsidize payments to individuals who survive longer than expected, thereby creating additional returns unavailable from conventional investments.

While mortality credits are a legitimate actuarial concept at the insurer’s pool level, their use in evaluating an individual participant’s expected benefit raises significant fiduciary disclosure concerns.

A. Mortality Credits Are Contingent Upon an Unknown Event

Unlike investment returns, interest payments, or bond coupons, mortality credits are not earned at a determinable rate. Their realization depends upon a single unknowable variable:The participant’s actual longevity.

No participant knows:

  • Whether they will survive to the actuarial breakeven age.
  • Whether they will survive long enough to receive meaningful mortality credits.
  • Whether they will die before recovering their principal.
  • Whether they will live sufficiently long to benefit from the experience of shorter-lived annuitants.

Consequently, mortality credits are not guaranteed returns. They are contingent benefits that become valuable only if a participant survives long enough to receive them.

B. Mortality Credits Exist at the Pool Level, Not the Individual Level

Insurers price annuities using population-level mortality assumptions.

The insurer knows that:

  • Some annuitants will die early.
  • Some will live exceptionally long.
  • The law of large numbers allows the insurer to predict aggregate experience.

The individual participant, however, experiences only one outcome. The participant either:

  1. Lives sufficiently long to benefit from mortality pooling; or
  2. Dies before receiving those benefits.

Thus, mortality credits that appear certain at the insurer level remain entirely uncertain at the participant level.

From the participant’s perspective, the alleged benefit remains speculative until longevity actually occurs.

C. Fiduciary Analysis Should Distinguish Between Guaranteed Payments and Speculative Benefits

A prudent breakeven analysis should separate:

  • Guaranteed contractual payments.
  • Return of principal.
  • Present-value calculations.
  • Speculative mortality benefits.

Combining these elements risks presenting uncertain future benefits as though they possess the same economic certainty as fixed income payments. A participant may reasonably believe:

“The annuity is expected to produce superior returns.”

When, in reality, the superior outcome may depend entirely upon surviving substantially beyond normal life expectancy. This distinction is material.

D. The Supreme Court’s Materiality Standard Supports Disclosure

Under TSC Industries and Basic, the question is whether a reasonable participant would consider information important.

A reasonable participant would likely consider it important to know:

  • That mortality credits are not guaranteed.
  • That they are contingent upon longevity.
  • That the participant may never realize them.
  • That economic breakeven may require survival well beyond average life expectancy.

Such information significantly alters the total mix of information available to the participant. Accordingly, the contingent nature of mortality credits itself constitutes material information.

E. The “Known or Should Have Known” Standard

Section 78(3) imposes a duty to disclose material information that fiduciaries knew or should have known.

Insurers, consultants, and fiduciary advisers routinely understand:

  • Mortality assumptions.
  • Breakeven ages.
  • Longevity probabilities.
  • Sensitivity analyses.
  • The dependence of mortality credits upon survival.

If fiduciaries know that the economic value of the annuity depends heavily upon longevity, participants may reasonably require that information to protect their interests. Failure to disclose that dependency may leave participants with an incomplete understanding of the risks and expected benefits.

F. Mortality Credits Are Better Viewed as Contingent Insurance Benefits

Mortality credits may therefore be more accurately characterized as contingent insurance benefits rather than investment returns.

They resemble:

  • Insurance proceeds contingent upon a covered event.
  • Longevity insurance.
  • Survival-contingent benefits.

Unlike interest or dividends, mortality credits cannot be independently earned, realized, or reinvested prior to the occurrence of the underlying contingency.Their value remains uncertain until the participant actually survives long enough to receive them.

Although mortality credits represent a legitimate actuarial concept at the pooled level, their use in individual participant analyses requires careful fiduciary treatment.

Because mortality credits:

  • Depend entirely upon uncertain longevity,
  • Cannot be guaranteed to any individual participant,
  • May never be realized,
  • Are unavailable to participants who die prematurely, and
  • Often determine whether an annuity ultimately produces economic value,

A legitimate argumnt can be made that their speculative nature constitutes material information under Section 78(3) of the Restatement (Third) of Trusts

XII. Loyalty Requires More Than Marketing Narratives

ERISA fiduciaries are not salespersons. They are fiduciaries.

The duty of loyalty prohibits presenting only favorable characteristics while omitting economically signif icant disadvantages.A communication emphasizing “Income you cannot outlive,while failing to disclose:

  • Low probabilities of economic breakeven,
  • Present-value losses,
  • Principal forfeiture risk,
  • Mortality dependence, or
  • Additional costs necessary to preserve principal,

may deprive participants of information necessary to protect their interests. Section 78(3) exists precisely to prevent such informational asymmetry.

Conclusion

ERISA plaintiff’s attorneys are increasingly adding fiduciary breach of duty claims based on the inadequacy or complete lack of necessary disclosures, as required under both ERISA Section 404(a) and Section 78(3) of the Restatement (Third) of Trusts.

What’s become increaisingly clear is that far too may plan sponsors are unaware of their disclosure resposibilities to plan participants, as well as the seriousness of the consequences for a failure to make the disclosures. The fiducairy duty to make the required duties is especially important with regard to in-plan annuities due to the complexity of the investment itself.

Applied to in-plan annuities, Section 78(3) of the Restatement (Third) of Trusts requires fiduciaries to disclose material information that they knew or should have known participants needed to protect their interests.

Under the Supreme Court’s materiality standards, information concerning:

  • Mortality-adjusted breakeven ages,
  • Present-value losses,
  • Probability of principal recovery,
  • Likelihood of achieving a commensurate return,
  • Costs of principal-protection riders, and
  • The possibility of forfeiting principal,

would frequently qualify as material because a reasonable participant would consider such information important in deciding whether to annuitize retirement assets.

The promise of lifetime income may be a benefit for some participants. But fiduciary law requires that participants receive mopre, that they the entire, complete economic picture. A fiduciary’s obligation is not merely to disclose the existence of a guarantee. It is to disclose the material facts necessary for participants to evaluate the value of that guarantee, thet they have sufficient infpormation to make an informed decision.

ERISA’s trust-law foundations, Section 78(3)’s affirmative duty of disclosure, and the Supreme Court’s objective materiality standards all point to the same conclusion: when fiduciaries know, or should know, that actuarial and economic analyses materially affect a participant’s decision to purchase an in-plan annuity, those facts must be disclosed. Silence is not neutrality. Under trust law, silence concerning material facts is itself a fiduciary act subject to judicial scrutiny.

Notes
1.Restatement (Third) of Trusts, Section 78(3). All rights reserved..
2.Varity Corp.v. Howe, 516 U.S. 489 (1996)(Varity)
3.Tibble v. Edison International, 575 U.S. 523, 528-30 (2015) (Tibble).
4.TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976).
5. Basic, Inc. v. Levinson, 435 U.S.224 (1988).
6. Donovan v. Bierwirth, 680 F.2d 263 (E.D.N.Y. 1981).
7. Tibble, supra.
8. Hughes v. Northwestern University, 595 U.s. 170 (2022).
9. Restatement, Section78(3), supra.
10.Pension and Welfare Benefits Administration, “Study of 401(k) Plan Fees and Expenses,” (DOL Study) http://www.DepartmentofLabor.gov/ebsa/pdf; “Private Pensions: Changes needed to Provide 401(k) Plan Participants and the Department of Labor Better Information on Fees,” (GAO Study).

© Copyright 2026 InvestSense, LLC. All rights reserved.

This article is for informational purposes only and is neither designed nor intended to provide legal, investment, or other professional advice since such advice always requires consideration of individual circumstances. If legal, investment, or other professional assistance is needed, the services of an attorney or other qulified professional advisor should be sought.

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Who’s Overseeing the DOL and EBSA? DOL FAB 2026-01’s Fatal Flaw Is Actually a Fiduciary Trap for Unwary Plan Sponsors

Posted on June 16, 2026 by jwatkins

James W. Watkins, III, J.D., CFP EmeritusTM, AWMA®
InvestSense, LLC

APPELLATE CLOSING ARGUMENT OPPOSING FAB 2026-01

May it please the Court:

At its core, this case presents a simple but critically consequential question:

Can the Department of Labor lawfully encourage fiduciaries to rely upon opaque, highly complex, and often commission-driven investment structures when ERISA expressly requires fiduciaries to conduct an independent and objective investigation of every investment option offered to plan participants?

The answer is no.

FAB 2026-01 {FAB} rests upon an assumption fundamentally at odds with ERISA’s fiduciary framework. The FAB repeatedly suggests that fiduciaries may satisfy their obligations through process-oriented reliance upon service providers, consultants, product manufacturers, and other market participants. Yet ERISA §404(a) imposes a duty far more demanding. A fiduciary must engage in an independent investigation and objective evaluation sufficient to determine whether an investment is prudent and in the best interests of participants.

The Sixth Circuit’s decision in Gregg v. Transportation Workers of America International1, 343 F.3d 833 (6th Cir. 2003), demonstrates precisely why FAB 2026-01 cannot be reconciled with ERISA. There, the court rejected the notion that fiduciaries may simply rely upon recommendations from individuals whose compensation and incentives are tied to the sale of the very products under consideration. The court emphasized that “one extremely important factor is whether the expert advisor truly offers independent and impartial advice.” The court further recognized that a broker compensated through commissions is not an objective analyst because such a person possesses a financial incentive to consummate transactions rather than provide disinterested fiduciary guidance. The Sixth Circuit accordingly held that reliance upon conflicted advisors could not automatically satisfy ERISA’s fiduciary obligations.

That principle is fatal to the reasoning underlying FAB 2026-01. The investments promoted or facilitated under the FAB frequently involve private markets, alternative assets, structured vehicles, insurance products, collective investment arrangements, proprietary valuation methodologies, layered fee structures, and complex risk-transfer mechanisms. These products are characterized not by transparency but by opacity. They often depend upon assumptions, internal valuations, proprietary algorithms, illiquid markets, and information unavailable to plan sponsors and participants alike.

The practical consequence is unavoidable: the more complex and opaque the investment, the more dependent the fiduciary becomes upon the very parties selling, managing, valuing, or promoting the product. That dependency is precisely what Gregg warned against.

A fiduciary cannot conduct an independent investigation when critical information is unavailable for independent verification. A fiduciary cannot objectively evaluate an investment when the underlying valuation methodology is proprietary. A fiduciary cannot meaningfully assess costs, risks, liquidity constraints, or expected performance when those elements are disclosed only through the representations of interested parties. And a fiduciary cannot satisfy ERISA’s duty of prudence merely by documenting meetings, collecting presentations, and recording procedural steps if the substantive information necessary for independent evaluation remains inaccessible.

Indeed, FAB 2026-01 creates a paradox that the Department never addresses .ERISA §404(a) requires independent investigation. The products contemplated by FAB 2026-01 often require reliance on information controlled by interested market participants. The greater the opacity of the investment, the less capable the fiduciary becomes of conducting the independent investigation ERISA demands. Thus, the very characteristics of these products make compliance with §404(a) increasingly difficult and, in many circumstances, practically impossible.

The Department attempts to solve this problem by elevating procedure over substance. But neither trust law nor Supreme Court precedent permits such a substitution.

ERISA derives directly from the common law of trusts. Under trust law, prudence is not established by the mere appearance of diligence. A trustee’s process has value only insofar as it leads to a prudent substantive decision based upon reliable and adequately investigated information. A checklist cannot transform unknowable facts into known facts. Documentation cannot cure informational asymmetry. Procedure cannot eliminate conflicts of interest.

The informational asymmetry inherent in many alternative and proprietary investment products is especially troubling because it prevents meaningful verification. Plan sponsors must ultimately rely upon the representations of those who design, sell, manage, value, and profit from the investments. Participants face an even greater disadvantage. They lack access to the underlying data, valuation assumptions, risk models, and compensation arrangements necessary to independently assess the prudence of the investments selected on their behalf.

The result is a fiduciary regime increasingly dependent upon trust in market intermediaries rather than independent fiduciary judgment. That is not what Congress enacted.

ERISA was designed to impose the highest duties known to the law. Those duties require fiduciaries to act as skeptical investigators, not passive recipients of sales presentations. They require objective evaluation, not deference to product sponsors. They require verification, not assumption.

The Sixth Circuit recognized in Gregg that reliance upon conflicted advisors cannot substitute for independent fiduciary judgment. The same principle applies with even greater force here, where the products themselves are so complex that independent verification may be unattainable. If fiduciaries cannot independently investigate and evaluate the investment, then they cannot establish that the investment satisfies ERISA’s prudence requirements. No amount of procedural documentation can alter that reality.

Ultimately, FAB 2026-01 asks fiduciaries to navigate a world in which critical information is controlled by interested parties, independent verification is often unavailable, and substantive prudence is presumed from procedural effort. That approach reverses ERISA’s design. It shifts the focus from whether an investment is objectively prudent to whether a fiduciary can document a process surrounding information it cannot independently verify.

The statute demands more.

The common law of trusts demands more.

Gregg demands more.

For these reasons, the Court should reject the reasoning embodied in FAB 2026-01 and reaffirm that ERISA §404(a) requires what it has always required: a genuinely independent, objective, and substantively meaningful investigation of every investment option offered to plan participants—an obligation that cannot be satisfied through reliance upon conflicted sources, opaque products, or procedural formalities divorced from verifiable facts.

Our argument is particularly strong when paired with the precedent established by the decisions in Donovan v. Bierwirth2, Tibble v. Edison International3, Hughes v. Northwestern University4, and Loper Bright Enterprises v. Raimondo5, because together those authorities reinforce that ERISA fiduciary duties are grounded in trust-law principles, require substantive prudence rather than mere procedural compliance, and are not subject to agency reinterpretation that departs from the statute’s common-law foundations. Henry Friendly’s requirement of a “careful and impartial investigation,” quoted favorably in Gregg, is especially useful because it directly links independent investigation to the fiduciary duty of prudence.

A FAILURE TO CONDUCT AN INDEPENDENT INVESTIGATION CONSTITUTES A PER SE VIOLATION OF ERISA’S PRUDENCE REQUIREMENT AND FURTHER DEMONSTRATES THE LEGAL DEFICIENCIES OF FAB 2026-01

The fundamental defect in FAB 2026-01 is not merely that it encourages fiduciaries to consider investment products characterized by substantial opacity, valuation uncertainty, and informational asymmetry. The FAB’s more profound legal flaw is that it effectively diminishes ERISA’s threshold requirement that fiduciaries conduct an independent investigation and evaluation before selecting or retaining plan investments.

Federal courts have repeatedly recognized that the duty to investigate is not a subsidiary component of prudence; rather, it is the essential predicate to any determination that an investment decision is prudent. Where a fiduciary fails to conduct the investigation required by ERISA § 404(a), the fiduciary commits a breach of duty irrespective of whether the investment subsequently performs well or poorly.

As the Second Circuit explained in Liss v. Smith6:

“The test of prudence is one of conduct, and not a test of the result of performance of the investment.”

The court further emphasized that fiduciaries must undertake an independent inquiry appropriate to the circumstances before making investment decisions. The fiduciary’s obligation is not satisfied by reliance upon assumptions, representations, or post hoc justifications. Rather, prudence requires a process capable of producing an informed decision.

Similarly, in Bussian v. RJR Nabisco, Inc7., the Fifth Circuit held that:

“The court’s task is to inquire whether the individual trustees, at the time they engaged in the challenged transactions, employed the appropriate methods to investigate the merits of the investment and to structure the investment.”

The Fifth Circuit further explained that a fiduciary’s failure to engage in an adequate investigation itself constitutes imprudence, regardless of the eventual outcome of the investment decision. Prudence is measured at the moment of decision-making, not through hindsight and not through subsequent performance.

These principles derive directly from trust law and have been repeatedly recognized throughout ERISA jurisprudence. Courts consistently hold that a fiduciary who fails to investigate cannot later justify the decision by pointing to favorable outcomes, nor can procedural formalities substitute for the substantive inquiry required by law.

This principle is especially significant in the context of FAB 2026-01. The FAB contemplates investment products whose complexity, illiquidity, proprietary valuation methodologies, layered fee structures, and limited transparency frequently prevent plan fiduciaries from independently verifying the information necessary to evaluate prudence. In many instances, fiduciaries must necessarily rely upon information generated by the very entities that manufacture, manage, value, market, or profit from the investment products.

The problem is not merely one of potential conflict. The problem is that such dependence may render the independent investigation required by ERISA impossible as a practical matter.

Under Liss, Bussian, and numerous related authorities, the inability to perform an independent investigation is itself legally consequential. If a fiduciary lacks sufficient information to independently evaluate an investment’s risks, costs, liquidity constraints, valuation methodology, and expected performance characteristics, then the fiduciary cannot satisfy the duty of prudence imposed by ERISA § 404(a). The breach occurs at that point.

The fiduciary need not select a demonstrably inferior investment.

The fiduciary need not cause immediate losses.

The fiduciary need not act in bad faith.

The failure to undertake the investigation required by ERISA constitutes the violation.

This principle is consistent with the foundational decision in Donovan v. Bierwirth,8 where the Second Circuit Court of Appealsheld that fiduciaries must employ the care, skill, prudence, and diligence of a prudent person acting in a like capacity and must conduct a thorough and impartial investigation before acting.

Likewise, the Supreme Court has repeatedly emphasized that ERISA fiduciary duties are derived from the common law of trusts and require fiduciaries to engage in a reasoned and informed decision-making process9: Taken together, these authorities establish a straightforward proposition:

A fiduciary who cannot independently investigate an investment cannot establish that the investment is prudent.

A fiduciary who does not independently investigate an investment violates ERISA.

And an agency interpretation that implicitly encourages fiduciaries to proceed despite informational barriers that prevent such investigation cannot be reconciled with ERISA’s statutory framework.

Accordingly, FAB 2026-01 suffers from a defect that extends beyond mere policy disagreement. The FAB 2026-01 effectively normalizes circumstances in which fiduciaries may be unable to perform the very investigation that courts have repeatedly identified as a prerequisite to prudent decision-making.

Under Loper Bright Enterprises v. Raimondo10, 603 U.S. 369 (2024), courts must exercise independent judgment in determining the meaning of statutes and need not defer to agency interpretations that conflict with the governing law.

Because FAB 2026-01 cannot be reconciled with ERISA’s statutory text, trust-law foundations, and the extensive body of precedent requiring an independent fiduciary investigation, the Bulletin is not merely unpersuasive. It is legally incompatible with the standards governing fiduciary conduct under ERISA and therefore should be afforded no weight in judicial proceedings.

The Court should reject any suggestion that procedural documentation, reliance upon conflicted sources, or acceptance of unverifiable information can substitute for the independent investigation and evaluation required by ERISA § 404(a). The case law demonstrates that such failures constitute fiduciary breaches at the moment they occur, rendering FAB 2026-01 fundamentally inconsistent with governing law, effectively a fiduciary breach trap for plan sponsors.

In summation:

“FAB 2026-01 assumes that fiduciaries may prudently select investments whose complexity and opacity prevent meaningful independent verification. Yet Bussian, Liss, Donovan, and their progeny establish the opposite rule: where a fiduciary cannot perform the investigation required by ERISA § 404(a), prudence cannot be established. The failure to investigate is not merely evidence of imprudence—it is the breach itself. An agency bulletin premised upon circumstances that frustrate the very investigation ERISA requires cannot be reconciled with the statute and therefore merits no judicial consideration under Loper Bright.”

Notes
1. Gregg v. Transportation Workers of America International1, 343 F.3d 833 (6th Cir. 2003).
2. Donovan v. Bierwirth, 680 F.2d 263 (E.D.N.Y 1981).
3. Tibble v. Edison International, 575 U.S. 523, 528–30 (2015)
4. Hughes v. Northwestern University, 595 U.S. 170, 175–77 (2022)
5. Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024).
6. Liss v. Smith, 991 F. Supp. 278, 300 (S.D.N.Y. 1998), aff’d, 211 F.3d 697 (2d Cir. 2000).
7. Bussian v. RJR Nabisco, Inc., 223 F.3d 286, 299–300 (5th Cir. 2000).
8. Bierwirth, supra.
9. Tibble, supra; Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409, 419–21 (2014); Hughes, supra.
10. Loper Bright Enterprises v. Raimondo,

© Copyright 2026 InvestSense, LLC. All rights reserved

This article is for informational purposes only and is neither designed nor intended to provide legal, investment, or other professional advice since such advice always requires consideration of individual circumstances. If legal, investment, or other professional assistance is needed, the services of an attorney or other qulified professional advisor should be sought.

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May It Please The Court: THE EBSA’s Legally Unsupported, Unfounded, and Bootstrapped Policies Create a Systemic Threat to Plan Participants and Plan Sponsors Alike and Must Be Rejected

Posted on May 26, 2026 by jwatkins

James W. Watkins, III, J.D., CFP EmeritusTM, AWMA®
InvestSense, LLC

The issue before this Court is not whether procedural prudence matters under ERISA. It unquestionably does. The issue is whether the Employee Benefits Security Administration (EBSA) may lawfully transform procedural prudence from an evidentiary consideration into a substitute for fiduciary prudence itself. That proposition is not merely unsupported. It is irreconcilable with ERISA’s text, the law of trusts, and decades of controlling judicial precedent.

The EBSA’s current position rests upon a fundamentally unstable premise — a legal “house of cards” constructed by incrementally extrapolating beyond what courts have actually held. The agency begins with a legitimate proposition: fiduciaries must employ a prudent process. But it then extends that proposition far beyond recognition, asserting in substance that the existence of a procedurally elaborate process is itself sufficient to establish fiduciary prudence, irrespective of whether the resulting decision was objectively reasonable, loyal, or substantively defensible. That leap finds no support in ERISA, trust law, or Supreme Court jurisprudence.

ERISA does not impose a mere paperwork standard. Congress enacted a fiduciary regime grounded in substantive protection of plan participants and beneficiaries. Section 404(a)(1)(B) requires fiduciaries to act “with the care, skill, prudence, and diligence under the circumstances then prevailing” that a prudent person would use in a like capacity. That language incorporates both method and outcome-oriented reasonableness. A fiduciary process is relevant because it helps determine whether the fiduciary actually acted prudently — not because process itself magically converts imprudent conduct into prudent conduct.

The Supreme Court has repeatedly treated procedural prudence as evidence of prudence, not as prudence per se. In Tibble v. Edison International1, the Court emphasized the continuing duty to monitor investments under trust-law principles. The Court did not suggest that a fiduciary could satisfy that duty merely by documenting meetings, retaining consultants, or following internal protocols while ignoring objectively unreasonable outcomes. To the contrary, Tibble reaffirmed that ERISA fiduciary obligations derive from trust law — a body of law that has never equated procedural formality with substantive prudence.

Likewise, in Fifth Third Bancorp v. Dudenhoeffer2, the Court rejected special presumptions insulating fiduciaries from substantive review. The Court instead demanded context-sensitive judicial scrutiny of fiduciary conduct. That framework is fundamentally incompatible with the EBSA’s apparent effort to create a de facto safe harbor based solely upon procedural ritualism.

Most importantly, the Supreme Court’s recent administrative law jurisprudence forecloses the degree of interpretive elasticity the EBSA now seeks to employ. Under Loper Bright Enterprises v. Raimondo3, agencies are not entitled to deference merely because they advance a plausible policy preference. Courts must independently determine the best reading of the statute. And the best reading of ERISA does not permit an agency to collapse substantive fiduciary review into a checklist-driven procedural exercise.

Indeed, the majority of federal circuit courts have consistently recognized that fiduciary prudence under ERISA contains both procedural and substantive dimensions. Courts routinely examine whether fiduciaries engaged in a reasoned process, but they also examine whether the resulting decisions were objectively reasonable under prevailing circumstances. The two inquiries are interconnected but distinct.

The EBSA’s contrary position attempts to erase that distinction altogether.

Under the agency’s apparent framework, a fiduciary could:

  • retain expensive and underperforming investments indefinitely,
  • ignore materially superior alternatives,
  • impose excessive costs upon participants,
  • or structure portfolios in ways inconsistent with accepted investment principles,

yet still claim prudence merely because committees met regularly, minutes were recorded, consultants were retained, and procedural boxes were checked.

That is not fiduciary law. That is administrative formalism masquerading as fiduciary protection.

Even more troubling, the EBSA’s position effectively institutionalizes a form of legally sanctioned willful blindness.

Under traditional trust principles, a fiduciary cannot deliberately avoid confronting evidence that its decisions are harming beneficiaries. A trustee may not shield itself behind process while consciously disregarding substantive warning signs. Yet the EBSA’s approach incentivizes precisely that behavior. So long as fiduciaries can demonstrate that meetings occurred and procedures were followed, they are tacitly encouraged not to ask the harder substantive questions:

  • Are participants actually receiving prudent investment options?
  • Are fees objectively excessive relative to available alternatives?
  • Are persistent underperformance patterns being meaningfully addressed?
  • Are fiduciaries evaluating economic realities, or merely preserving litigation defenses?

A regime that rewards procedural insulation while discouraging substantive inquiry creates a dangerous moral hazard. Fiduciaries become incentivized to cultivate plausible deniability rather than genuine prudence. The resulting process ceases to function as a tool for protecting participants and instead becomes a mechanism for avoiding accountability.

That is the essence of willful blindness: constructing systems designed not to discover imprudence.

And courts have repeatedly rejected analogous attempts in other legal contexts to substitute formal compliance mechanisms for actual substantive responsibility. The law does not permit actors to avoid liability by intentionally narrowing their field of vision. ERISA fiduciaries should not become the sole exception to that foundational principle.

Trust law has never tolerated such a result. A trustee who carefully documents an irrational decision does not become prudent by virtue of documentation alone. Nor does a fiduciary become prudent by deliberately refusing to confront evidence inconsistent with a preferred narrative of compliance. Process matters because it tends to produce prudent decisions. But when process becomes detached from substantive reasonableness, it degenerates into empty ceremony — or worse, into a sophisticated form of institutionalized indifference.

The danger of the EBSA’s position is therefore not merely doctrinal. It is systemic.

By elevating procedural optics above substantive participant outcomes, the agency creates perverse incentives throughout the retirement system. Fiduciaries become incentivized to maximize defensibility rather than participant welfare — to generate committee records instead of investment value, to prioritize consultant memoranda over economic reality, and to engage in defensive bureaucracy rather than genuine fiduciary stewardship.

That approach undermines the very purpose of ERISA.

Congress enacted ERISA because participants lacked the expertise and leverage necessary to protect themselves against imprudent fiduciary conduct. The statute was designed to impose meaningful fiduciary accountability — not to create a litigation-resistant compliance theater in which process alone immunizes objectively harmful decisions.

Nor can the EBSA evade this problem by characterizing substantive review as impermissible hindsight. Courts are fully capable of distinguishing between prohibited hindsight bias and legitimate evaluation of objective prudence. Federal courts have done so for decades. The existence of market uncertainty does not eliminate the requirement that fiduciary decisions possess a rational substantive foundation when made.

The EBSA’s position also produces a profound logical contradiction. If procedural prudence alone establishes fiduciary prudence, then substantive prudence effectively disappears from ERISA altogether. Yet ERISA’s statutory language does not distinguish between procedural prudence and substantive prudence because the statute contemplates both as components of a unified fiduciary obligation. The agency’s interpretation therefore impermissibly rewrites the statute by excising substantive accountability from fiduciary review.

This Court should reject that effort.

An agency cannot manufacture legal authority through repetition. It cannot bootstrap a novel fiduciary theory from selective quotations stripped of their doctrinal context. And it cannot convert isolated judicial references to “process” into a wholesale abandonment of substantive fiduciary review when neither Congress nor the Supreme Court has authorized such a transformation.

At bottom, the EBSA’s position is unstable because it lacks the essential structural support that legitimate legal doctrines require:

  • no textual foundation in ERISA,
  • no grounding in traditional trust law,
  • no endorsement from the Supreme Court,
  • no meaningful consensus among the federal circuits,
  • and no principled answer to the obvious danger of willful blindness inherent in its framework.

Without those supports, the theory collapses under its own weight.

It is, in every meaningful sense, a house of cards.

And because ERISA exists to protect plan participants rather than bureaucratic abstractions, this Court should decline the invitation to replace genuine fiduciary prudence with procedural symbolism. The law requires more than documented process. It requires fiduciaries to act prudently in substance, loyally in purpose, and reasonably under the circumstances actually confronting them.

Anything less would reduce ERISA’s fiduciary protections from a substantive safeguard into a merely procedural illusion

Notes
1. Tibble v. Edison, 575 U.S. 523 (2015).
2. Fifth Third Bancorp v. Dudenhoeffer, 573 573 U.S. 409 (2014).
3. Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024).

© Copyright 2026 InvestSense, LLC. All rights reserved

This article is for informational purposes only and is neither designed nor intended to provide legal, investment, or other professional advice since such advice always requires consideration of individual circumstances. If legal, investment, or other professional assistance is needed, the services of an attorney or other qulified professional advisor should be sought.

.

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A Call for Senate Oversight Hearings: The Systemic Risk to Plan Sponsors and Plan Participants Created by the EBSA’s Expansive and Legally Unsupported Extrapolations of ERISA Fiduciary Principles

Posted on May 24, 2026 by jwatkins

James W. Watkins, III, J.D., CFP EmeritusTM, AWMA®
InvestSense, LLC

Employee Benefits Security Administration (“EBSA”) may not transform generally accepted fiduciary concepts into categorical legal mandates untethered from statutory text, judicial precedent, or established trust-law principles.

This appeal presents a fundamental question concerning the permissible boundaries of administrative interpretation under the Employee Retirement Income Security Act of 1974 (“ERISA”): whether the Employee Benefits Security Administration (“EBSA”) may transform generally accepted fiduciary concepts into categorical legal mandates untethered from statutory text, judicial precedent, or established trust-law principles.

The answer is no.

The EBSA’s emerging modus operandi reflects a recurring pattern of regulatory overextrapolation whereby narrow, context-dependent judicial observations are elevated into rigid doctrinal propositions. This phenomenon is particularly evident in the agency’s treatment of “procedural prudence.” While courts have long recognized procedural prudence as an important evidentiary component of fiduciary conduct, the EBSA has increasingly suggested—either explicitly or functionally—that adherence to procedural formalities alone is sufficient to establish fiduciary prudence under ERISA.

That position is irreconcilable with ERISA jurisprudence.

The governing case law uniformly establishes that fiduciary prudence under ERISA contains both procedural and substantive dimensions. A prudent process is relevant because it is evidence bearing on the ultimate question of prudence—not because process itself constitutes prudence as a matter of law. The distinction is critical. By collapsing substantive prudence into mere procedural formalism, the EBSA effectively substitutes bureaucratic box-checking for genuine fiduciary accountability.

The consequences are severe.

For plan sponsors, the EBSA’s approach creates regulatory uncertainty, increased litigation exposure, distorted fiduciary incentives, and compliance regimes divorced from actual participant welfare. For participants, the approach risks legitimizing economically harmful investment decisions merely because fiduciaries can demonstrate the existence of a superficially documented process.

ERISA was enacted to protect retirement security, not to create a safe harbor for imprudent outcomes cloaked in procedural ritualism.

Under modern administrative law principles, including the Supreme Court’s rejection of reflexive agency deference in Loper Bright Enterprises v. Raimondo, courts must independently determine whether the EBSA’s interpretations are consistent with statutory text, trust-law principles, and binding precedent. The EBSA’s procedural-prudence-only framework fails that inquiry.

STATEMENT OF THE ISSUE

Whether the EBSA exceeds its lawful interpretive authority under ERISA by extrapolating the generally accepted principle that procedural prudence is relevant to fiduciary analysis into the unsupported proposition that procedural prudence alone is sufficient to establish fiduciary prudence, notwithstanding longstanding precedent requiring both procedural and substantive prudence.

STANDARD OF REVIEW

Questions involving statutory interpretation, the scope of agency authority, and the legal meaning of fiduciary obligations under ERISA are reviewed de novo.

Following Loper Bright Enterprises v. Raimondo, courts are no longer required to defer reflexively to agency interpretations merely because statutory ambiguity exists. Rather, courts must exercise independent judgment in determining the best interpretation of the statute.

Accordingly, the EBSA’s interpretive assertions regarding fiduciary prudence are entitled only to the persuasive weight justified by their reasoning, consistency, and fidelity to ERISA’s statutory framework and common-law trust principles

ARGUMENT

I. ERISA FIDUCIARY PRUDENCE HAS ALWAYS REQUIRED BOTH PROCEDURAL AND SUBSTANTIVE PRUDENCE

ERISA’s fiduciary framework derives substantially from traditional trust law. Section 404(a)(1)(B) requires fiduciaries to 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.”

This language imposes a duty concerning conduct and outcomes alike.

Courts consistently recognize that procedural prudence is important because it provides evidence regarding whether fiduciaries acted prudently. But courts have never held that procedural compliance itself conclusively establishes prudence.

Indeed, the entire structure of ERISA litigation presupposes that procedural evidence is probative rather than dispositive.

The Supreme Court’s decision in Fifth Third Bancorp v. Dudenhoeffer emphasized careful context-sensitive scrutiny of fiduciary decision-making, not blind reliance on procedural formalities. Likewise, Tibble v. Edison International reaffirmed that fiduciaries possess a continuing duty to monitor investments substantively, not merely to document periodic review procedures.

Numerous circuit courts similarly have rejected the notion that process alone immunizes fiduciaries from liability. Courts routinely examine:

  1. The economic substance of fiduciary decisions;
  2. The reasonableness of fees;
  3. Comparative performance;
  4. Risk-adjusted characteristics;
  5. Availability of superior alternatives;
  6. Participant impact; and
  7. Long-term economic consequences.

Such inquiries would be legally irrelevant if procedural prudence alone established fiduciary compliance.

The EBSA’s apparent extrapolation therefore conflicts directly with the judicial understanding of prudence as an integrated substantive and procedural standard.

II. THE EBSA’S EXTRAPOLATION CONSTITUTES IMPROPER ADMINISTRATIVE BOOTSTRAPPING

The agency’s reasoning reflects a classic form of administrative bootstrapping.

The original proposition—that procedural prudence is relevant evidence of fiduciary prudence—is uncontroversial. From that modest premise, however, the EBSA appears to infer progressively broader conclusions:

  1. Procedural prudence is important;
  2. Therefore procedural prudence is primary;
  3. Therefore procedural prudence is presumptively sufficient;
  4. Therefore substantive review becomes secondary or unnecessary.

Each inferential step departs further from established law.

This interpretive inflation mirrors the precise administrative excesses modern separation-of-powers jurisprudence seeks to prevent. Agencies may clarify statutory obligations; they may not manufacture novel legal standards by exaggerating isolated concepts beyond their logical and legal limits.

ERISA nowhere states that fiduciary prudence may be satisfied through procedural documentation alone. Nor has any controlling court adopted such a principle.

The EBSA’s approach effectively rewrites ERISA’s prudence requirement into a “reasonable paperwork” standard.

But ERISA protects retirement assets, not administrative appearances.

A fiduciary who meticulously documents a catastrophically imprudent investment decision has not fulfilled ERISA’s fiduciary obligations merely because meeting minutes exist.

Likewise, a fiduciary cannot satisfy the duty of prudence by engaging consultants, holding committee meetings, or generating extensive reports if the underlying investment decisions remain objectively unreasonable relative to participant interests.

To conclude otherwise would sever fiduciary law from economic reality.

III. THE EBSA’S POSITION IS INCONSISTENT WITH TRUST-LAW FOUNDATIONS UNDERLYING ERISA

ERISA fiduciary duties are informed by the common law of trusts. Traditional trust law never treated procedure as a substitute for substantive prudence.

The prudent-investor rule evaluates whether fiduciaries exercised reasonable judgment in pursuing beneficiary interests under prevailing circumstances. Process matters because it informs the reliability of fiduciary judgment—not because it independently satisfies fiduciary obligations irrespective of substantive consequences.

The Restatement principles underlying modern fiduciary law repeatedly emphasize that fiduciaries must act reasonably in light of risk, return, diversification, preservation of capital, and beneficiary objectives.

Under trust law:

  • A carefully documented imprudent investment remains imprudent;
  • A formally reviewed excessive-fee arrangement remains excessive;
  • A procedurally vetted economically irrational strategy remains irrational.

The EBSA’s procedural formalism therefore represents a departure not only from ERISA precedent but from the trust-law heritage Congress incorporated into ERISA itself.

IV. THE EBSA’S APPROACH CREATES SYSTEMIC RISKS FOR PLAN SPONSORS

The agency’s framework creates profound practical and legal instability for plan sponsors.

A. It Encourages Defensive Bureaucracy Rather Than Genuine Prudence

If procedural documentation becomes the primary determinant of prudence, fiduciaries are incentivized to prioritize process optics over substantive participant outcomes.

This creates a culture of defensive compliance characterized by:

  • excessive consultant reliance;
  • overdocumentation;
  • procedural redundancy;
  • checkbox governance; and
  • litigation-oriented record creation.

Such conduct increases plan costs without necessarily improving participant welfare.

B. It Increases Litigation Exposure Through Regulatory Ambiguity

The EBSA’s shifting and expansive interpretations create substantial uncertainty concerning what fiduciaries must actually do to satisfy ERISA obligations.

Plan sponsors face a paradoxical environment where:

  • formal procedures may be deemed sufficient during investigations,
    yet
  • plaintiffs may still challenge substantive outcomes in litigation.

This inconsistency produces precisely the unpredictability ERISA was intended to avoid.

C. It Distorts Investment Decision-Making

A process-centric regime may discourage fiduciaries from considering innovative or participant-beneficial investment structures if such structures deviate from conventional procedural templates.

Fiduciaries may instead default toward “litigation-safe” decisions rather than economically superior decisions.

That distortion harms retirement outcomes.

V. THE GREATEST RISKS FALL UPON PLAN PARTICIPANTS

The ultimate victims of procedural formalism are plan participants.

ERISA exists to protect beneficiaries’ retirement security, purchasing power, and long-term financial welfare. A framework that elevates process above substance undermines those objectives.

Under the EBSA’s apparent approach, participants could suffer substantial economic harm while fiduciaries remain insulated because procedural artifacts exist demonstrating meetings, reviews, and consultant involvement.

Such a regime creates the dangerous possibility that:

  • excessive fees become defensible if periodically reviewed;
  • underperforming investments become acceptable if monitored;
  • capital-destructive strategies become protected if documented.

This transforms fiduciary prudence from a substantive duty of loyalty and care into an exercise in administrative self-protection.

ERISA does not tolerate such a result.

VI. MODERN ADMINISTRATIVE LAW REQUIRES REJECTION OF THE EBSA’S OVEREXPANSIVE INTERPRETATIONS

Under Loper Bright Enterprises v. Raimondo, courts must independently determine statutory meaning rather than defer automatically to agency preferences.

The EBSA’s procedural-prudence-only extrapolation warrants little persuasive weight because it:

  1. conflicts with statutory text;
  2. conflicts with trust-law principles;
  3. conflicts with longstanding precedent;
  4. produces economically irrational outcomes;
  5. expands agency authority without congressional authorization; and
  6. undermines ERISA’s participant-protection purposes.

Moreover, the Supreme Court’s recent administrative-law jurisprudence repeatedly warns against agency efforts to discover transformative powers in vague statutory language.

The EBSA’s attempt to redefine fiduciary prudence through interpretive escalation is precisely the type of administrative overreach courts are now obligated to scrutinize skeptically.

CONCLUSION

The EBSA’s current interpretive trajectory reflects an increasingly problematic pattern of regulatory overextrapolation whereby modest and generally accepted legal principles are transformed into sweeping doctrinal assertions unsupported by statutory text, trust law, or judicial precedent.

Exhibit A is the agency’s apparent suggestion that procedural prudence alone may establish fiduciary prudence under ERISA.

That proposition is legally indefensible.

ERISA fiduciary prudence has always required a synthesis of procedural and substantive prudence. Process is evidence—not destiny. Documentation is relevant—not dispositive. Administrative ritual cannot substitute for genuine fiduciary judgment directed toward participant welfare.

By elevating procedural formalism above substantive fiduciary accountability, the EBSA exposes plan sponsors to regulatory confusion, increased litigation risk, distorted incentives, and unnecessary compliance burdens while simultaneously exposing participants to economically harmful fiduciary decisions shielded by superficial procedural compliance.

The Senate HELP committee should reject the EBSA’s unsupported extrapolations and reaffirm that ERISA fiduciary prudence remains grounded in both procedural integrity and substantive reasonableness, consistent with statutory text, trust-law principles, and longstanding jurisprudence, and require the EBSA to act accordingly going forward,

© Copyright 2026 InvestSense, LLC. All rights reserved

This article is for informational purposes only and is neither designed nor intended to provide legal, investment, or other professional advice since such advice always requires consideration of individual circumstances. If legal, investment, or other professional assistance is needed, the services of an attorney or other qulified professional advisor should be sought.

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DOL/EBSA Field Assistance Bulletin 2026-01 Is Not Entitled to Judicial Deference Under The Loper Bright Decision

Posted on May 18, 2026 by jwatkins

James W. Watkins, III, J.D., CFP EmeritusTM, AWMA®
InvestSense, LLC

In DOL/EBSA Field Assitance Bulletin 2026-01 (FAB 2026-01), the Department of Labor states its belief that its proposed legislation is entitled to legal deference. Nothing could be further from the truth. FAB 2026-01 is based on an administrative construct that is neither grounded in ERISA’s text nor supported by the governing body of fiduciary jurisprudence. After the Supreme Court’s decision in Loper Bright Enterprises v. Raimondo1, courts no longer yield interpretive authority merely because an agency advances a preferred policy outcome. The judiciary—not the agency—is charged with saying what the law is. And when the agency’s interpretation is inconsistent with statutory text, trust-law principles, and controlling precedent, no deference is warranted.

FAB 2026-01 fails that test at every level.

At its core, FAB 2026-01 is constructed upon a fundamentally misleading and legally unsupported premise: that fiduciary prudence under ERISA may be established—or defeated—solely through evidence of “procedural prudence,” divorced from substantive outcomes and objective economic reality. But that proposition is not the law. It has never been the law.

ERISA fiduciary jurisprudence has consistently recognized that prudence contains both procedural and substantive dimensions. Fiduciaries must employ a prudent process, but courts also examine whether that process produced decisions consistent with the interests of participants and beneficiaries. The statute itself imposes a duty to act “with the care, skill, prudence, and diligence” that a prudent fiduciary would exercise under like circumstances, which necessarily encompasses both method and result.2

The Supreme Court’s decisions in Fifth Third Bancorp v. Dudenhoeffer3 and Hughes v. Northwestern University4 do not reduce prudence to a procedural checklist. Nor did the Second Circuit in Donovan v. Bierwirth5 hold that fiduciaries may satisfy ERISA merely by documenting a process untethered from substantive participant welfare. To the contrary, Bierwirth emphasized that courts must determine whether fiduciaries acted with “complete and undivided loyalty” and with the care of prudent persons managing another’s property—not whether fiduciaries merely generated paperwork sufficient to survive scrutiny.

The EBSA’s contrary theory is therefore not an interpretation of existing law; it is an attempt to rewrite it.

And the agency’s effort is especially problematic because the Bulletin repeatedly invokes “clearly established case law” while simultaneously advancing propositions that no federal appellate court has actually endorsed. The internal contradiction is glaring. The agency cannot claim fidelity to settled precedent while constructing an enforcement framework around a theory that lacks meaningful judicial support.

Indeed, FAB 2026-01s analytical architecture appears substantially derived from advocacy-oriented commentary advanced in blog posts and litigation-position papers associated with Mr. Aronowitz and his former fiduciary insurance firm, rather than from neutral judicial precedent. Yet the Bulletin presents these contested advocacy positions as though they represent settled federal law. That omission is material. Agencies are not free to launder private litigation theories into quasi-regulatory authority while obscuring the advocacy origins of those theories.

Even more troubling is FAB 2026-01’s overt attempt to invade the exclusive province of the judiciary and to circumvent the Federal Rules of Civil Procedure.

FAB 2601-01 repeatedly frames ERISA litigation through the lens of “frivolous litigation” and advocates for heightened barriers to discovery and pleading standards designed to terminate cases before factual development may occur. But those matters are governed by the Federal Rules of Civil Procedure and by Article III courts—not by administrative preference.

Neither the DOL nor the the EBSA possesses authority to create a shadow procedural regime for ERISA cases.

Whether a complaint survives dismissal is governed by Rules 8, 12, and the controlling precedents interpreting those rules. Whether discovery is appropriate is governed by Rules 26 through 37 and by judicial supervision. The Executive branch cannot, through interpretive bulletins, predetermine merits outcomes by restricting litigants’ access to discovery or by imposing extra-statutory evidentiary burdens before plaintiffs have any opportunity to obtain fiduciary records uniquely within defendants’ possession.

That concern is particularly acute in ERISA litigation, where the relevant information regarding fiduciary deliberations, fee negotiations, benchmarking practices, revenue sharing, and investment monitoring is almost always controlled exclusively by defendants.

FAB 2026-01 thus attempts to accomplish indirectly what the agency could never accomplish directly: judicial merits adjudication without judicial process.

And respected jurists across the ideological spectrum have already warned against precisely this kind of procedural distortion.

Justice Ketanji Brown Jackson has repeatedly cautioned against converting pleading standards into premature merits determinations that deny plaintiffs meaningful access to adjudication. Sixth Circui Judge Jeffrey Sutton has similarly emphasized that federal courts must not impose heightened procedural barriers untethered from the Federal Rules themselves. And Judge Sidney H. Stein has recognized the importance of factual development in complex ERISA fiduciary litigation, particularly where fiduciary decision-making cannot be fairly evaluated absent discovery.

FAB 2026-01 disregards those warnings entirely, furher evidencing the EBSA’s pattern of willful blindness in order to promote and protect the interests of plan sponsors and the indsurance industry, rather then follow ERISA’s mandate and to protect and protect the best interests of plan participants and their beneficiaries

Under Loper Bright Enterprises v. Raimondo5, courts must exercise independent judgment when determining the meaning of statutes. Agencies are entitled at most to persuasive respect proportional to the quality of their reasoning. But reasoning built upon selective precedent, litigation-driven advocacy theories, and procedural overreach is not persuasive. It is arbitrary.

The courts therefore owe FAB 2026-01 no deference.

Not Chevron6 deference, because Chevron is gone.

Not Skidmore7 respect, because FAB 2026-01 lacks the “power to persuade.”

And certainly not controlling weight where the agency’s interpretation conflicts with statutory text, trust-law principles, governing precedent, and the constitutional separation of powers.

ERISA was enacted to protect plan participants and beneficiaries—not to insulate fiduciaries from judicial scrutiny through administrative shortcuts. The Federal Rules of Civil Procedure exist to ensure that cases are decided on evidence, not ideology. And Article III reserves adjudication to courts, not agencies seeking to influence litigation outcomes through informal pronouncements masquerading as settled law.

For those reasons, the legal system should reject FAB 2026-01’s suggestion that the proposal is subject to any legal deference and should reaffirm that fiduciary prudence under ERISA remains a judicial question governed by statute, precedent, and the ordinary processes of adjudication—not by agency efforts to predetermine outcomes through extra-statutory administrative advocacy.

The ongoing campaign of betrayal of plan participants and their beneficiaries by both the DOL and the EBSA in order to promote the best interests of both plan sponsors and the insurance induastty must stop in order to preserve ERISA’s integrity and the as well as the statute’s original principles and goals.

Notes
1. Loper Bright Enterprises v. Raimondo, 603 U.S. 661 (2024). (Loper Bright)
2. 29 U.S.C. § 1104(a)(1)(B).
3. Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409 (2014).
4. Hughes v. Northwestern University, 595 U.S.170 (2022).
5. Donovan v Bierwirth, 680 F.2d 263.
5. Loper Bright, supra.
6. Chevron U.S.A. v. Natural Resources Defense Council, Inc.,467 U.S. 837 (1984).
7. kidmpore v. Swift& Co., 323 U.S. 134 (1944).

© Copyright 2026 InvestSense, LLC. All rights reserved.

This article is for informational purposes only and is neither designed nor intended to provide legal, investment, or other professional advice since such advice always requires consideration of individual circumstances. If legal, investment, or other professional assistance is needed, the services of an attorney or other qulified professional advisor should be sought.

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Fatally Flawed: Why DOL Administrative Bulletin 2026-01 Will Not, and Should Not, Withstand Judicial Scrutiny

Posted on May 4, 2026 by jwatkins

James W. Watkins, III, J.D., CFP EmeritusTM, AWMA®
InvestSense, LLC

May it please the Court:

EBSA Assistance Bulletin 2026-01 (Bulletin) contains a defect that is not merely analytical, but structural: it is internally inconsistent on its face. The Bulletin expressly conditions enforcement on alignment with “clearly established case law,” yet the governing premise it adopts—that fiduciary prudence may be satisfied by process alone—is unsupported by, and in tension with, the very body of law it invokes. That contradiction is fatal.

Start with the agency’s own limiting principle. By tethering enforcement to “clearly established case law,” EBSA concedes that its authority is bounded by existing judicial interpretations of ERISA and its incorporated trust-law standards. That concession should end the inquiry, because no such “clearly established” authority endorses a purely procedural conception of prudence. To the contrary, the case law uniformly requires a combined assessment of process and substance.

The Supreme Court’s ERISA jurisprudence leaves no room for EBSA’s position. In Tibble v. Edison International, the Court grounded ERISA’s fiduciary duties in trust law and emphasized the ongoing duty to monitor and remove imprudent investments—an obligation that necessarily turns on the substantive merits of the investment, not merely the process used to select it. 575 U.S. 523, 529–30 (2015). In Fifth Third Bancorp v. Dudenhoeffer, the Court rejected categorical presumptions that would insulate fiduciaries from meaningful scrutiny, insisting instead on a context-sensitive evaluation of whether fiduciary conduct is actually prudent. 573 U.S. 409, 425–26 (2014). And in Hughes v. Northwestern University, the Court made explicit that fiduciaries cannot rely on the existence of some prudent options to excuse the inclusion of imprudent ones. 595 U.S. 170, 177–79 (2022). That holding is irreconcilable with a regime in which process alone suffices.

Lower courts have applied the same integrated standard. In Donovan v. Bierwirth, the Second Circuit held that fiduciaries must act “with an eye single” to participants’ interests and are liable where their decisions deviate from what a prudent fiduciary would have done. 680 F.2d 263, 271–72 (2d Cir. 1982). That inquiry is inherently substantive: it evaluates the economic reasonableness of the decision, not just the procedural steps taken to reach it.

The trust-law principles ERISA incorporates confirm the same point. The Restatement (Third) of Trusts § 90 does not reduce prudence to process. It imposes a duty to incur only reasonable costs and to pursue appropriate risk–return objectives for beneficiaries. Restatement (Third) of Trusts § 90 cmt. b, d (Am. L. Inst. 2007). Those are substantive constraints. A fiduciary who follows a careful process but selects objectively inferior or excessively costly investments has not satisfied the duty of prudence under trust law.

Against that backdrop, the Bulletin’s internal contradiction becomes clear. It purports to require adherence to “clearly established case law,” yet it advances a standard—procedural prudence alone—that no such case law recognizes. That is not an interpretation; it is a departure. And it is a departure in a direction the Supreme Court has repeatedly rejected: toward categorical insulation of fiduciary conduct from substantive review.

This inconsistency has concrete consequences. By anchoring enforcement to “clearly established law” while simultaneously redefining that law in a way that strips out substantive review, EBSA creates an illusory constraint. The Bulletin appears to narrow agency discretion, but in practice expands it—allowing fiduciaries to claim compliance based on process alone, even where outcomes are economically indefensible. That result cannot be reconciled with ERISA’s text, which requires fiduciaries to act with the “care, skill, prudence, and diligence” of a prudent person, 29 U.S.C. § 1104(a)(1)(B), nor with ERISA’s purpose of protecting plan participants. See 29 U.S.C. § 1001(b).

Nor is this a gap in the law that the agency may fill. Where the Supreme Court and the circuits have already articulated the governing standard, there is no ambiguity for the agency to resolve. See Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842–43 (1984). And even if there were, an interpretation that conflicts with those precedents would be unreasonable as a matter of law. Cf. Kisor v. Wilkie, 588 U.S. 558, 575–76 (2019).

In short, EBSA cannot have it both ways. It cannot invoke “clearly established case law” as a limiting principle while advancing a fiduciary standard that no such law supports. The Bulletin’s premise is not merely unpersuasive—it is unmoored from ERISA, from trust law, and from controlling precedent. That internal inconsistency renders the Bulletin arbitrary, legally unsound, and undeserving of judicial acceptance. For those reasons, and for the reasons previously stated, the Court should reject EBSA’s formulation and reaffirm that fiduciary prudence under ERISA requires both procedural integrity and substantive reasonableness.Discuss the fact that the EBSA’s arguments suggesting stronger pleading standards and restrictions on discovery are inconsistent with the Federal Rules of Civil Procedure, as are the EBSA’s attempts to decide cases on their merits, which is the exclusive province of the courts, not federal agencies

That aspect of the Bulletin presents an additional—and independently disqualifying—legal flaw. EBSA is not merely misreading ERISA’s fiduciary standard; it is attempting to reshape federal litigation itself in a manner that conflicts with governing procedural law and exceeds its institutional role.

First, the Bulletin’s suggestion that ERISA claims should be subject to heightened pleading standards is incompatible with the framework established by the Federal Rules of Civil Procedure. Rule 8(a)(2) requires only “a short and plain statement of the claim showing that the pleader is entitled to relief.” The Supreme Court’s decisions in Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555–56 (2007), and Ashcroft v. Iqbal, 556 U.S. 662, 678–79 (2009), clarified that complaints must be “plausible,” not that they must plead detailed evidence or prove their case at the outset. Nothing in those decisions authorizes an agency—through sub-regulatory guidance—to impose ERISA-specific super-pleading requirements.

To the contrary, the Supreme Court has repeatedly rejected efforts to impose categorical or heightened barriers at the pleading stage in ERISA fiduciary litigation. In Hughes v. Northwestern University, 595 U.S. 170, 177–79 (2022), the Court reversed dismissal of fiduciary breach claims precisely because the lower courts had demanded too much at the pleading stage. The Court emphasized that ERISA claims must be evaluated under ordinary pleading standards, with context-specific analysis—not judicially or administratively imposed shortcuts that truncate meritorious claims before discovery.

Second, the Bulletin’s effort to restrict access to discovery is equally inconsistent with the Rules. Under Rule 26(b)(1), parties are entitled to obtain discovery regarding any nonprivileged matter that is relevant to any party’s claim or defense and proportional to the needs of the case. In ERISA fiduciary breach cases, discovery is often indispensable because the relevant information—fee structures, benchmarking data, fiduciary deliberations—is uniquely within the control of the fiduciaries themselves. The Supreme Court recognized this asymmetry in Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409, 425 (2014), cautioning courts to balance the need to weed out meritless claims against the reality that plaintiffs frequently require discovery to substantiate their allegations.

EBSA’s position effectively inverts that balance. By encouraging early merits-based screening and constrained discovery, it imposes evidentiary burdens at the pleading stage that the Federal Rules do not permit. That is not an interpretation of ERISA; it is an attempt to rewrite the procedural architecture governing federal litigation.

Third—and most fundamentally—the Bulletin intrudes into the adjudicative function itself. Determining whether a fiduciary’s conduct was prudent under ERISA is a merits question entrusted to Article III courts. See, e.g., Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 110–11 (1989) (grounding ERISA adjudication in trust-law principles applied by courts). Agencies may enforce statutes and promulgate rules within delegated authority, but they do not decide private ERISA breach claims on their merits. By framing certain categories of conduct as effectively compliant—based on process alone—and by encouraging dismissal prior to factual development, EBSA is functionally pre-judging cases that Congress assigned to the judiciary..

Finally, this procedural overreach reinforces the Bulletin’s internal inconsistency. EBSA claims fidelity to “clearly established case law,” yet no such case law authorizes an agency to heighten pleading standards, curtail discovery, or effectively adjudicate fiduciary prudence through guidance documents. The governing authorities—Rule 8, Rule 26, and decisions such as Twombly, Iqbal, Hughes, and Dudenhoeffer—point in the opposite direction: toward ordinary pleading standards, context-sensitive analysis, and fact development through discovery.

That separation-of-functions problem is not abstract. It has concrete doctrinal consequences. The Federal Rules reflect a deliberate allocation of responsibility: pleadings test legal sufficiency; discovery develops the factual record; and summary judgment or trial resolves the merits. EBSA’s approach collapses those stages into a single, front-loaded inquiry dominated by agency-preferred factors. That approach is incompatible with the Rules Enabling Act framework and with the Supreme Court’s repeated insistence that ERISA fiduciary claims be evaluated through ordinary litigation processes—not through categorical screens or presumptions imposed from outside the judiciary.

In short, EBSA’s litigation-focused positions are not merely unpersuasive—they are ultra vires. They conflict with the Federal Rules of Civil Procedure, encroach on the judiciary’s exclusive role in adjudicating ERISA claims, and further underscore that the Bulletin is not an application of “clearly established law,” but a departure from it.

As a result, the Senate should schedule EBSA oversight hearings as soon as possible to detrmine if the totality of the EBSA actions thus far have constitutued a bretrayal of American workers. One can easily argue , with merit, that the unexplainied decision not to pursue the appeal of the Retirement Security Rule was a betryal of American wrol=kers, especially given given the support of both the the support the Rule and the process that the DOL employed, by two prominent federal judges, Judge Barbara Lynn of the Northernern District of Texas, and Judge Carl Stewart of the Fifth Circuirt, who openly dissented from the Fiffth Circuit in the courts’s decision to stay the enforcement of the Rule.

The Senate should also inquire into why the EBSA, in connection with the decision not to pursue the Retirement Security Rule decision, promised that a new version of the Rule would be forthcoming, only to have the EBSA subsequently announce that no such revision would be forthcoming, with no meaningful explanantion for the change in plans. During this time, the EBSA has issued several amicus briefs, all supporting and advocating on behalf of the best interests of plan sponsors and the insurance industry, at the expense of plan participants and their beneficiries, the very parties that ERISA states are to be protected.

© Copyright 2026 InvestSense, LLC. All rights reserved.

This article is for informational purposes only and is neither designed nor intended to provide legal, investment, or other professional advice since such advice always requires consideration of individual circumstances. If legal, investment, or other professional assistance is needed, the services of an attorney or other qulified professional advisor should be sought.

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Terminal Wealth: The True Fiduciary Prudence Paradigm with Regard to the In-Plan Annuity Scam

Posted on April 21, 2026 by jwatkins

James W. Watkins, III, J.D., CFP EmeritusTM, AWMA®
InvestSense, LLC

A sound evaluation of fiduciary prudence must ultimately be anchored in outcomes, not just process—and in the context of long-term financial decision-making, the most meaningful outcome is terminal wealth. Fiduciaries are entrusted not merely with following procedures, but with stewarding assets in a way that maximizes the beneficiary’s financial position at the end of the investment horizon. While process-oriented metrics like diversification, cost control, and adherence to policy statements are important, they are only proxies for what truly matters: the financial result delivered.

This principle becomes especially clear when annuities that require annuitization enter the analysis. Such products fundamentally alter the nature of wealth by converting a liquid, inheritable asset base into an irreversible income stream. Once annuitization occurs, the remaining capital is no longer accessible, transferable, or responsive to changing circumstances. That decision locks in a terminal wealth outcome at the moment of conversion, often eliminating residual value altogether unless specific (and typically costly) riders are in place.

A fiduciary evaluating whether to recommend or include such an annuity must therefore weigh not just the stability of income provided, but the impact on total terminal wealth. An income stream may appear attractive in isolation, but if it comes at the cost of significantly reduced aggregate wealth—particularly when compared to alternative strategies that preserve liquidity and optionality—it raises serious questions about prudence. The fiduciary duty of care demands a holistic comparison, not a narrow focus on income smoothing or behavioral benefits.

Moreover, terminal wealth captures critical dimensions of financial well-being that annuitization can compromise. These include legacy goals, flexibility in response to unforeseen expenses, and the ability to adapt to market or personal changes. A strategy that maximizes guaranteed income but leaves no residual estate may fail to align with a client’s broader objectives, even if it appears “safe” on the surface. Prudence, in this sense, cannot be reduced to minimizing volatility or ensuring predictability; it must incorporate the full economic trade-offs involved.

Importantly, focusing on terminal wealth does not imply ignoring risk—it reframes it. The relevant question is not simply whether an approach reduces short-term uncertainty, but whether it does so efficiently relative to the long-term cost. Annuities that require annuitization often embed significant fees, mortality credits, and insurer profit margins, all of which can erode expected value. A fiduciary who overlooks these impacts in favor of superficial guarantees risks prioritizing form over substance.

In conclusion, terminal wealth serves as a unifying metric that integrates return, risk, cost, and constraint into a single, outcome-oriented standard. Especially when dealing with irreversible decisions like annuitization, it provides a clear lens through which fiduciary prudence can be judged. A process may be compliant, and an income stream may be stable, but if the end result unnecessarily diminishes the client’s total financial position, the fiduciary has fallen short of their fundamental obligation.

For fiduciary prudence purposes, compare two paths for a 65-year-old female investing $100,000:

  • Option A: Immediate annuity (fully annuitized, no residual value)
  • Option B: Laddered portfolio of Treasury notes/CDs (principal preserved, modest yield, terminal wealth remains)

Key Assumptions

  • Immediate annuity payout: ~$6,500/year (typical for a 65F, no inflation adjustment)
  • Life expectancy: ~21 years (to age 86)
  • Discount rate (risk-free benchmark): 3.5%
  • Laddered portfolio yield: 3.5% annually
  • Portfolio withdrawals: matched to annuity income ($6,500/year)
  • Residual portfolio value remains accessible (terminal wealth)

1. Present Value & Terminal Wealth Comparison

MetricImmediate AnnuityLaddered T-Notes/CD Portfolio
Initial Investment$100,000$100,000
Annual Income$6,500$6,500 (self-withdrawal)
Present Value of Income (21 yrs @ 3.5%)~$96,000~$96,000
Terminal Wealth at Life Expectancy$0~$100,000
LiquidityNoneFull (subject to ladder structure)
Mortality Credit BenefitYesNo
Residual Estate ValueNonePreserved

2. Mortality-Adjusted Breakeven Analysis

To determine when the annuity “wins” on a terminal wealth basis, we calculate the age at which cumulative annuity payments (discounted) exceed both:

  • The initial $100,000, and
  • The preserved terminal wealth from the ladder strategy
AgeYears of PaymentsCumulative PaymentsPV of Payments @3.5%Ladder Terminal WealthNet Advantage
7510$65,000~$54,000~$100,000Ladder dominates
8015$97,500~$77,000~$100,000Ladder dominates
86 (life expectancy)21$136,500~$96,000~$100,000Ladder slightly ahead
9025$162,500~$110,000~$100,000Rough breakeven
9530$195,000~$130,000~$100,000Annuity dominates

3. Interpretation for Fiduciary Prudence

  • At normal life expectancy (86):
    The annuity does not fully recover its opportunity cost when evaluated on a present value + terminal wealth basis.
  • Breakeven occurs ~age 90+:
    The annuity requires above-average longevity to justify its irreversible loss of capital.
  • Mortality risk is the pivot:
    The annuity only outperforms if the individual lives significantly longer than expected, effectively “earning” mortality credits.
  • Terminal wealth gap is decisive:
    The ladder strategy preserves ~$100,000 in estate value, while the annuity reduces this to zero.

4. Fiduciary Conclusion

From a fiduciary prudence perspective grounded in terminal wealth:

  • The annuity represents a longevity insurance bet, not a wealth-maximizing strategy under average conditions.
  • The laddered portfolio dominates under expected mortality, offering equivalent income, retained liquidity, and preserved terminal wealth.
  • Recommending annuitization without clear evidence of above-average longevity or strong income certainty needs risks subordinating total economic value to income framing.

The breakeven analysis shows that annuitization must be justified not by its guarantees alone, but by a probabilistic expectation of extended lifespan sufficient to overcome the embedded loss of capital. Prudent investors and prudent investment fiduciaries simply do not voluntairly forfeit capital without even the opportunity to receive a commensurate return. My investors shaerw the same sentiments of Mark Twain – “I am not so concerned about the return ON my investment as I am the return OF my investment! Yet, a simple breakeven analysis of most in-plan annuities, once present value and mortality risk are factored in, shows that is the likely result.

This is why we advised our fiduciary risk minimization clients to insiste that anyone recommending an in-plan annuity for their plan provide them with a properly prepared written breakeven analysis similar to the one contained herein. Why written? It can conveniently serve as “Exhibit A” if litigation becomes necessary. Requiring such documentation also helps establich a plan sponsor’s due diligence process, which is always a good thing in fiduciary litigation. Full disclosure: Don’t expect an in-plan annuity peddler to agree to your request. After they know the quality of their products. Now so do you. As arguably the nation’s leading ERISA attorneys, Fred Reish, is fond of saying: “Forewarned is forearmed.”

© Copyright 2026 InvestSense, LLC. All rights reserved.

This article is for informational purposes only and is neither designed nor intended to provide legal, investment, or other professional advice since such advice always requires consideration of individual circumstances. If legal, investment, or other professional assistance is needed, the services of an attorney or other qulified professional advisor should be sought.

Posted in fiduciary compliance | Tagged , , , , , , , , , , , , , , | Leave a comment