The Prudent Investment Fiduciary Rules

Is the DOL/EBSA Trying to Serve Two Masters? ERISA Section 404(a)’s Independent Investigation and Evaluation Requirements and the DOL/EBSA Proposed Rule on Alternative Investments

Posted on April 12, 2026 by jwatkins

Is the DOL and EBSA trying to Serve Two Masters? The DOL’s proposed rule for alyternative investments suggests the answer is “yes,” given the known lack of transparency associaes with such products. Worse yet, it has been suggested that alternative investments be considered as qualified default investment alternatives (QDIAs).

Matthew 6:24

“No one can serve two masters. Either you will hate the one and love the other, or you will be devoted to the one and despise the other. You cannot serve both God and money.”

This teaching is part of Jesus’ Sermon on the Mount and emphasizes divided loyalty—specifically warning against trying to prioritize both God and material wealth.

The DOL’s recently proposed rule on alternative investments ignores the fact that ERISA section 404(a) requires a plan sponsor to conduct an independent investigation and evaluation on each investment option chosen for a 401k plan. However, the very nature of alternative investments typically involves a basic lack of transparency, which effectively prevents the verification by a plan sponsor required by ERISA 404(a).

The Department of Labor’s Proposed Rule Impermissibly Dilutes ERISA § 404(a)’s Core Requirement of Independent Investigation

The Department of Labor’s proposed rule concerning the inclusion of alternative investments in defined contribution plans fails to grapple with a foundational requirement of fiduciary prudence under ERISA: the duty to conduct an independent investigation and evaluation of each investment option prior to its selection. This obligation, embedded in ERISA § 404(a)(1)(B), is not aspirational—it is mandatory, and it has been consistently reinforced by the courts as a substantive component of fiduciary prudence.

At its core, ERISA fiduciary law—grounded in trust law—requires more than procedural formalities. It requires that fiduciaries know what they are doing, based on a reasoned and independent evaluation of the merits and risks of each investment. This duty cannot be satisfied where the investment itself resists meaningful scrutiny.

Alternative investments, by their very design, frequently lack transparency. They often involve opaque valuation methodologies, limited disclosure, illiquidity, and reliance on sponsor-provided data that cannot be independently verified. These characteristics create an inherent structural barrier to the very investigation ERISA requires. A fiduciary cannot prudently evaluate what it cannot adequately see, test, or verify.

The Department’s proposed rule attempts to reconcile this irreconcilable tension by implicitly lowering the bar—suggesting that procedural steps or generalized due diligence may suffice even where substantive verification is not possible. But this approach conflicts with the governing statutory standard. ERISA does not permit fiduciaries to substitute trust in representations for independent judgment grounded in verifiable information.

The principle at issue can be captured succinctly: a fiduciary cannot simultaneously satisfy the duty of independent investigation while relying on investment structures that preclude such investigation. As a matter of logic and law, these obligations are mutually exclusive.

This tension is aptly illustrated by the well-known admonition: “No one can serve two masters… You cannot serve both God and money.” (Matthew 6:24). While not a source of legal authority, the analogy is instructive. Under Aronowiz’s leadership, a valid argument can be made that everything the EBSA has done has been been to impermissibly promote and protect the best interests of plan sponosrs and the insurance industry, at the expense of plan particiapnts and their beneficiaries. This is clearly inconsistent with ERISA’s stated goals and purpoaes and the DOL’s mission statement.

Just as divided loyalties are untenable in that context, so too is the attempt to reconcile ERISA’s demand for independent fiduciary judgment with investment vehicles that inherently depend on blind reliance. A fiduciary cannot serve both the statutory mandate of independent evaluation and the practical reality of opaque, unverifiable investment products.

The Department’s rule effectively invites fiduciaries to attempt precisely that—placing them in an untenable position where compliance with ERISA § 404(a) is, in practice, compromised. Courts have repeatedly rejected such dilution of fiduciary duty, emphasizing that prudence requires both a thorough investigation and a reasoned determination based on that investigation. Where the investigation itself is constrained by opacity, the resulting decision cannot be deemed prudent.

Accordingly, the proposed rule is not merely incomplete; it is fundamentally inconsistent with ERISA’s fiduciary framework. By failing to account for the incompatibility between alternative investments’ lack of transparency and the statutory requirement of independent investigation and evaluation, the Department has advanced a standard that cannot be reconciled with established law. It also sets up plan sponsors for litigation for a fiduciary breach, the EBSA’s preferred ruse du jour.

American workers deserve an, by law, are entitled to better protection. In a March 26, 2026, New York Times article described various reports by current and former DOL employees and describing the current DOL environment as “chaos.” As a result, Senator Grassley, a member of the HELP committee (Health, Education, Labor and Pensions )has reportedly requested documents and is considering requesting oversight hearings into the current issues at the DOL. Hopefully, the HELP committee will also consider expanding any Congressional oversight hearings to address the EBSA’s continual disregard for relevant legal precedent and ERISA’s stated purposes.

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 professional advisor should be sought.

Posted in fiduciary compliance | Tagged 401k, ERISA, fiduciary law, fiduciary liability, fiduciarylitigation, plansponsor, retirement plans | Leave a comment

Much Ado About Nothing?: The DOL’s New Alternative Investment Rule vs. the Administrative Procedure Act

Posted on April 5, 2026 by jwatkins

James W. Watkins, III, J.D., CFP Emeritus^TM, AWMA®
InvestSense, LLC

When the DOL announced the relases of its new alternative investments rule, we quickly advised out fiduciary risk minimization clients to simply ignore it, as it failed our basic two-step fiduciary analysis process:

1. Does ERISA require the product/strategy to be offered within a plan?
2. If not, could/would the product/strategy potentially expose the plan to unnecessary fiduciary liability? Here, even the DOL warned plan sponsors of the potential liability.

The second reason we advised our fiducairy riask management to simply ignore the proposed rule altogether was that upon review of the rule, I concluded that thre is little chance of the proposed rule passing judicial scrutiny under the Administrative Procedure Act (APA), as the rule is “arbitrary and capricious” based on current APA judicial precedent.

Upon close examination, despite being titled i nterms of “alternative investments,” I consider the release and proposed riule to be yet another continued attempt to illegally deny plan participants acccess to the courts, which is clearly inconsistent with Congessional intent, as evidenced by the legislative history of ERISA. Furhter evidence of this intent is supported by the fact that release used the term “litigation” over 105 times.

The Proposed Rule and EBSA’s Litigation Positions Violate the Administrative Procedure Act

The Department’s proposed rule cannot withstand scrutiny under the Administrative Procedure Act¹ because it is internally inconsistent, departs from prior agency positions without adequate explanation, and rests on rationales that conflict with both statutory text and binding precedent.

I. The Rule Is Arbitrary and Capricious Because It Is Inconsistent with ERISA’s Trust Law Foundation

The Supreme Court has repeatedly held that Employee Retirement Income Security Act of 1974 fiduciary duties are derived from the common law of trusts. In Firestone Tire & Rubber Co. v. Bruch², the Court made clear that “ERISA abounds with the language and terminology of trust law” and must be interpreted accordingly. Likewise, Varity Corp. v. Howe³ reaffirmed that courts should look to “the law of trusts” to define fiduciary obligations under ERISA.

More recently, in Fifth Third Bancorp v. Dudenhoeffer⁴, the Court again emphasized that ERISA’s fiduciary standards are rooted in trust law principles, rejecting attempts to create atextual modifications to those duties.

Those principles include the burden-shifting framework reflected in the Restatement (Second) of Trusts § 100, under which a fiduciary who has breached its duty bears the burden of proving that the breach did not cause the loss.

By adopting a rule that effectively avoids or undermines these trust law consequences, the Department is not interpreting ERISA—it is contradicting it. Under Motor Vehicle Manufacturers Association v. State Farm Mutual Automobile Insurance Co.⁵, agency action is arbitrary and capricious where it “runs counter to the evidence before the agency” or fails to align with governing law. That is precisely the defect here.

II. The Department Fails to Provide a Reasoned Explanation for Departing from Prior Positions

An agency must provide a reasoned explanation when it changes course. In FCC v. Fox Television Stations, Inc.⁶, the Court held that while agencies may revise their policies, they must “display awareness that it is changing position” and show that the new policy is permissible and justified.

Here, the Employee Benefits Security Administration has, in prior amicus briefs, emphasized ERISA’s grounding in trust law and the importance of fiduciary accountability consistent with those principles. The proposed rule adopts a materially different approach—one that minimizes or avoids the implications of trust law, including burden shifting.

Yet the Department offers no acknowledgment of this shift, let alone a reasoned explanation. Under Fox, that failure alone renders the rule unlawful.

III. The Department’s Reliance on “Frivolous Litigation” Is Pretextual and Contrary to ERISA’s Legislative Design

The Department’s asserted concern about “frivolous litigation” is both legally insufficient and internally contradictory.

As an initial matter, ERISA’s enforcement scheme reflects Congress’s deliberate choice to rely on private litigation. In Massachusetts Mutual Life Insurance Co. v. Russell⁷, the Court recognized that ERISA’s civil enforcement provisions were “carefully integrated” to provide participants with meaningful remedies. Similarly, LaRue v. DeWolff, Boberg & Associates⁸, Inc. reaffirmed the central role of participant lawsuits in enforcing fiduciary duties.

An agency may not invoke concerns about litigation to undermine a statutory scheme that expressly depends on it.

Moreover, under State Farm, an agency acts arbitrarily when it offers an explanation that is implausible or inconsistent with the record. Here, the Department’s litigation rationale conflicts with its own prior positions. In amicus briefs, the EBSA has repeatedly defended robust private enforcement as essential to ERISA’s function. Its current reliance on litigation as a justification for weakening fiduciary accountability is therefore pretextual.

IV. The Rule Reflects Impermissible Outcome-Oriented Reasoning

The APA prohibits agencies from adopting rules driven by desired outcomes rather than reasoned analysis. In Department of Commerce v. New York⁹, the Court rejected agency action where the stated rationale was pretextual and did not reflect the agency’s true reasoning.

Here, the structure of the rule reveals an effort to avoid the consequences of applying trust law principles—particularly the burden placed on fiduciaries to disprove causation following a breach. The Department is aware that this burden would expose widespread fiduciary vulnerability, especially in connection with complex financial products such as annuities.

But avoiding statutory consequences is not a permissible basis for regulation. As the Court emphasized in State Farm, agencies must engage in reasoned decision-making grounded in the statute—not in policy preferences about economic impact.

V. The Rule’s Internal Contradictions Undermine Its Reasonableness

Finally, the rule is independently invalid because it is internally inconsistent. It purports to clarify fiduciary duties while simultaneously adopting standards that dilute them. It invokes ERISA’s protective purpose while advancing interpretations that weaken enforcement.

Such contradictions violate the APA’s requirement of reasoned decision-making. As State Farm makes clear, an agency must articulate a “rational connection between the facts found and the choice made.” The Department has failed to do so.

VI. The Proposed Rule Is Not Entitled to Deference Under Chevron or Loper Bright

The Department cannot rely on judicial deference to salvage the proposed rule. Whether analyzed under the traditional framework of Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc.¹⁰ or the Supreme Court’s more recent decision in Loper Bright Enterprises v. Raimondo¹¹, the rule fails.

A. Even Under Chevron, the Rule Is Unlawful

Under Chevron, an agency interpretation receives deference only if (1) the statute is ambiguous and (2) the agency’s interpretation is reasonable.

Neither condition is satisfied here.

At Step One, ERISA is not ambiguous as to the source of its fiduciary standards. The Supreme Court has repeatedly held that Employee Retirement Income Security Act of 1974 incorporates the common law of trusts. See, e.g., Firestone Tire & Rubber Co. v. Bruch; Varity Corp. v. Howe; Fifth Third Bancorp v. Dudenhoeffer. That interpretive directive leaves no gap for the agency to fill with a conflicting framework.

At Step Two, even if ambiguity existed, the Department’s interpretation would still fail because it is not reasonable. An interpretation that effectively discards core trust law principles—such as the burden-shifting framework reflected in the Restatement (Second) of Trusts § 100—cannot be reconciled with the statute’s structure or purpose.

Chevron deference does not permit an agency to adopt an interpretation that contradicts the very body of law Congress incorporated.

B. Under Loper Bright, the Court Owes No Deference to the Agency’s Interpretation

Any reliance on Chevron is, in any event, misplaced. In Loper Bright Enterprises v. Raimondo, the Supreme Court made clear that courts must exercise independent judgment in interpreting statutes and may not defer to agency interpretations merely because a statute is ambiguous.

Under Loper Bright, the question is not whether the Department’s interpretation is permissible, but whether it is correct.

It is not.

Applying independent judicial judgment, the Court must interpret ERISA in accordance with its text, structure, and historical context—all of which point to trust law as the governing framework. As discussed, that framework includes established principles governing fiduciary liability and burden allocation.

The Department’s rule, which attempts to avoid those principles, cannot survive de novo review.

C. The Major Questions Doctrine Further Confirms That Deference Is Inappropriate

Even if ambiguity could be manufactured, this case implicates questions of vast economic and legal significance. The rule effectively reshapes fiduciary liability exposure across the retirement system, with substantial downstream effects on plan sponsors, financial institutions, and fiduciary liability insurers.

Under West Virginia v. Environmental Protection Agency¹², courts require clear congressional authorization before permitting agencies to exercise such sweeping authority.

No such authorization exists here. ERISA does not grant the Department power to redefine fiduciary liability in a manner that departs from its trust law foundation. To the contrary, the statute presumes adherence to those principles.

Conclusion

Because the proposed rule conflicts with Supreme Court precedent interpreting ERISA, departs from prior agency positions without explanation, relies on pretextual reasoning, and fails the standards articulated in Motor Vehicle Manufacturers Association v. State Farm Mutual Automobile Insurance Co. and FCC v. Fox Television Stations, Inc., it violates the Administrative Procedure Act.

Furthermore, because the proposed rule fails under both Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc. and Loper Bright Enterprises v. Raimondo, and raises serious concerns under West Virginia v. Environmental Protection Agency, it is not entitled to judicial deference.

The Court should interpret ERISA independently and should rule that the rule is ulawful and set the rule aside.

Notes
1. Admininstrative Procedure Act, 5 U.S.C.A. Sections 551 -559.
2. Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989).
3. Varity v. Howe, 516 U.S. 489 (1996).
4. Fifth Third Bancorp v. Dudednhoeffer, 573 U.S. 409 (2014).
5. Motor Vehicle Mfg. Assn. v. State Farm Ins. Co., 463 U.S. 29 (1983).
6. FCC v. Fox Television Stations, 556 U.S. ____ (2009).
7. Mass Mutual Life Ins. Co. v. Russell, 473 U.S. 134 (1985).
8. LaRue v. DeWolff, Boberg, & Associates, 553 U.S. 248 (2008).
9. Dept. of Commerce v. New York, 558 U.S. ____ (2019).
10. Checron USAInc. v. NAtural Resources Defense Council, Inc., 467 U.S.837 (1984).
11. Loper Bright Enterprises v. Raimondo, 200 U.S. 321 (2024).
12. West Virginia v. EPA, 597 U.S. 697 (2022).

About jwatkins

I am a securities and ERISA attorney. I hold CFP Board Emeritus™ status and I am an Accredited Wealth Management Advisor™. I provide fiduciary risk management consulting to 401k/430b plans, trustees, RIAs and other investment fiduciaries. I am a 1977 graduate of Georgia State University and a 1981 graduate of the University of Notre Dame Law School. I am the author of “CommonSense InvestSense: The Power of the Informed Investor” and “The 401(k)/403(b) Investment Manual: What Plan Sponsors and Plan Participants REALLY Need To Know” I write two blogs, “CommonSense InvestSense, investsense.com, and “The Prudent Investment Fiduciary Rules, fiduciaryinvestsense.com. As a former compliance director, I have extensive experience in evaluating the legal prudence of various types of investments, including mutual funds and annuities. My goal is to combine my legal and compliance experience in order to help educate investors and investment fiduciaries on sound, proven investment strategies that will help them protect their financial security and/or avoid unnecessary fiduciary liability exposure.

View all posts by jwatkins →

Posted in fiduciary compliance | Tagged 401k, EBSA, ERISA, ERISA litigation Congress, fiduciary law, history, news, plan sponsors, retirement plans, Supreme Court | Leave a comment

Reasserting ERISA’s Private Enforcement Design: A Rebuttal to EBSA’s “Frivolous Litigation” Narrative

Posted on March 31, 2026 by jwatkins

James W. Watkins, III, J.D., CFP Emeritus^TM, AWMA®
InvestSense, LLC

I. Introduction

Recent statements by the EBSA leadership and Assistant DOL Secretary, Daniel Aronowitz, frame ERISA litigation as abusive,” “frivolous,” and in need of increased structural restrictions. Aronowitz has called for a “PSLRA” for ERISA, similar to the SEC Act covering the general securities market. Aronowitz has advocated for heightened pleading standards, restricted standing requirements, and judicial doctrines designed to shield ERISA fiduciaries from litigation and liability.

This position, however, is inconsistent with ERISA’s statutory design, controlling Supreme court precedent, and the legislative history of ERISA itself. Properly understood, ERISA depends upon participant-driven litigation as a primary enforcement mechanism. Therefore, efforts to restrict access to the courts undermine -not further- ERISA’s core purposes.

II. THE EBSA’s PRETEXTUAL JUSTIFICATION CONTRADICTS ERISA’S TEXT, PURPOSE, AND LEGISLATIVE DESIGN

A. ERISA Was Deliberately Designed As a Participant-Enforced Statute Providing Broad Access to Federal Courts

Congress’ intent is explicit in both statutory text and legislative history: ERISA is a remedial, litigation-driven enforcement regime.

1.. Statutory Mandate: “Ready Access to the Federal Courts”

ERISA § 2(b), 29 U.S.C. § 1001(b), provides:

“to protect … participants and beneficiaries … by providing for appropriate remedies, sanctions, and ready access to the Federal courts.”

This is not aspirational language; it is a structural directive that civil litigation is the primary enforcement mechanism.

2.. Legislative History Confirms Congress Intended Expansive Participant Litigation

The Senate and House Reports—consistently relied upon by the Supreme Court—state:

Senate Report No. 93-127: ERISA is “designed specifically to provide… participants and beneficiaries with broad remedies for redressing or preventing violations.”
Further: to provide “the full range of legal and equitable remedies … and to remove jurisdictional and procedural obstacles … which hampered effective enforcement.”
House Report No. 93-533: enforcement provisions are to be “liberally construed to provide … broad remedies.”

3. Doctrinal Implications

Congress made three deliberate choices:

Participants—not regulators—would enforce fiduciary obligations
Courts—not agencies—would police fiduciary conduct
Barriers to litigation were to be removed, not erected

IiI. Supreme Court Doctrine Reinforces That Courts Already Possess Adequate Tools to Address Abusive Litigation

Recent Supreme Court oral arguments directly undermine claims that ERISA litigation requires additional gatekeeping.

A. Justice Jackson: Courts Already Police Frivolous Litigation

During oral argument (e.g., fiduciary breach / pleading sufficiency context), Justice Ketanji Brown Jackson emphasized:

“Don’t we already have tools to deal with frivolous litigation?”

She specifically referenced:

Motions to dismiss under Rule 12(b)(6)
Rule 11 sanctions
Judicial control over discovery

And further:

“Why isn’t that sufficient?”

3. Litigation Significance

This line of questioning reflects a critical doctrinal principle:

The federal judiciary—not administrative agencies—controls the calibration of litigation burdens and abuse prevention.

4. Structural Separation: Judicial Case Management vs. Substantive Barriers

The Court’s discussion highlights a distinction:

Proper Mechanism	Improper Mechanism
Rule 12(b)(6) dismissal	Heightened pleading beyond statute
Rule 11 sanctions	Categorical limits on claims
Managed discovery	Preclusion of participant suits

ERISA’s design aligns exclusively with the left column.

IV. EBSA’s Amicus Positions Advocating Restrictions on ERISA Litigation Are Doctrinally Inconsistent with Congressional Design

The litigation positions advanced by the Employee Benefits Security Administration—particularly under leadership such as Daniel Aronowitz—frequently assert that ERISA litigation is plagued by “frivolous” claims requiring judicial constraint.

A. EBSA’s “Frivolous Litigation” Thesis

EBSA has argued in multiple amicus contexts that:

ERISA litigation imposes undue burdens on plan sponsors
Courts should impose stricter pleading or evidentiary thresholds
Discovery should be curtailed to prevent abuse

B. Direct Conflict with Congressional Intent

These positions are irreconcilable with ERISA’s legislative design:

Congressional Intent	EBSA Litigation Position
“Ready access to courts”	Restrict access via heightened thresholds
“Broad remedies”	Narrow actionable claims
Remove procedural obstacles	Introduce new litigation barriers
Participant-driven enforcement	Sponsor-protective filtering

C. Conflict with Supreme Court Reasoning

EBSA’s approach is also inconsistent with the Supreme Court’s expressed view—articulated in questioning by Justice Ketanji Brown Jackson—that:

Existing procedural tools are sufficient to address abusive litigation.

D. Doctrinal Tension

EBSA’s position implicitly asserts:

Courts are incapable of managing ERISA litigation without additional constraints.

The Supreme Court’s response:

Courts already possess—and routinely employ—adequate mechanisms.

V. ERISA’s Trust-Law Foundations Further Undermine EBSA’s Restrictive Approach

ERISA is grounded in the common law of trusts. Under trust law:

Beneficiaries have broad rights to sue fiduciaries
Courts serve as the primary forum for enforcement
Remedies are expansive and equitable in nature

Key Principle

Limiting access to courts is antithetical to fiduciary accountability.

EBSA’s litigation stance effectively inverts this structure by:

Shielding fiduciaries from scrutiny
Elevating sponsor interests over beneficiary rights
Reintroducing the very enforcement barriers ERISA was enacted to eliminate

VI. Conclusion: EBSA’s Litigation Positions Represent a Structural Departure from ERISA’s Core Enforcement Model

The combined weight of:

Statutory text (“ready access to the Federal courts”)
Legislative history (“broad remedies,” “remove obstacles”)
Supreme Court reasoning (courts already control frivolous litigation)

establishes a clear rule:

ERISA enforcement depends on robust participant access to judicial remedies, not administrative or judicial contraction of claims at the threshold.

Accordingly, any argument—whether advanced by EBSA or otherwise—that seeks to curtail participant litigation based on generalized concerns about “frivolous” suits is:

Contrary to congressional intent
In tension with Supreme Court doctrine
Inconsistent with ERISA’s trust-law foundations

VII. ERISA’s Text and Legislative Purpose Affirmatively Enshrine Civil Litigation as a Core Enforcement Mechanism

EBSA’s attempt to characterize participant litigation as “frivolous” or excessive is irreconcilable with the statute Congress enacted.

Congress expressly designed ERISA to expand—not restrict—access to federal courts as a primary enforcement tool. The statute itself provides for “appropriate remedies and access to the federal courts” as a central means of protecting participants.

This was not incidental. It reflects Congress’s deliberate rejection of an exclusively administrative enforcement regime in favor of participant-driven litigation as a necessary enforcement backstop.

A. Legislative Design: Private Enforcement Was Intended to Supplement Limited Government Oversight

ERISA’s civil enforcement scheme (§ 502(a)) was modeled to ensure that plan participants act as “private attorneys general”, filling enforcement gaps left by limited agency resources. Courts have repeatedly recognized that ERISA’s structure depends on private suits to ensure fiduciary accountability.

This design mirrors other federal statutes—such as the False Claims Act—where Congress explicitly empowered private litigants to vindicate statutory violations when government enforcement is insufficient. See, e.g., the qui tam mechanism allowing citizens to sue “on behalf of the government” to enforce statutory compliance.

The analogy is instructive: Congress uses private litigation precisely where violations are difficult to detect and regulators face structural limits—conditions that are equally present in ERISA fiduciary misconduct.

B. Legislative History Confirms Congress Intended Broad, Participant-Friendly Court Access

The legislative history of ERISA repeatedly emphasizes that effective enforcement required ready access to federal courts:

Congress intended “full and fair access to the courts” for participants and beneficiaries (Conference Report).
Civil actions were designed as the “primary enforcement mechanism” to ensure fiduciary compliance.
The statutory scheme reflects concern that without robust litigation rights, fiduciary standards would be “illusory.”

Thus, EBSA’s position willfully ignores congressional intent: what the agency labels “frivolous litigation” is, in fact, the mechanism Congress deliberately empowered to police fiduciary abuse.

VIII. EBSA’s Position Impermissibly Rewrites ERISA by Imposing Extra-Statutory Barriers to Suit

Recent policy arguments—such as heightened pleading standards, discovery stays, or procedural barriers justified by “meritless litigation”—are not neutral refinements. They are substantive restrictions on statutory rights.

As reflected in ongoing legislative proposals aimed at “curb[ing] meritless class actions” by raising pleading burdens and staying discovery, such efforts would materially limit participants’ ability to enforce ERISA rights.

But those restrictions are for Congress—not EBSA—to enact. Agencies cannot:

Rewrite § 502(a)’s broad grant of standing;
Narrow judicial remedies Congress deliberately made expansive; or
Rebalance enforcement away from participants toward regulated entities.

To do so violates basic separation-of-powers principles and the settled rule that agencies may not override statutory enforcement schemes through policy preferences.

IX. The “Frivolous Litigation” Narrative Is Factually and Structurally Misleading

A. ERISA Litigation Is Already Heavily Filtered by Courts

Federal courts already apply:

Rule 12(b)(6) dismissal standards
Heightened pleading requirements under modern jurisprudence
Summary judgment standards
Sanctions for frivolous claims

Thus, the premise that ERISA litigation proceeds unchecked is demonstrabl false and knowingly disingenous. The judiciary—not EBSA—is the constitutionally designated gatekeeper for merit.

B. Enforcement Data Shows Violations Are Widespread, Not Rare

Even EBSA’s own enforcement reporting demonstrates systemic noncompliance, with investigations resulting in widespread corrective actions affecting millions of participants.

This undercuts any claim that litigation is predominantly frivolous; rather, it reflects pervasive fiduciary violations requiring enforcement.

X. EBSA’s Position Reflects Institutional Bias Favoring Plan Sponsors and Insurers

EBSA’s litigation-restrictive stance is not neutral. It aligns consistently with plan sponsor and insurance industry interests:

Limiting discovery reduces exposure of fiduciary misconduct
Raising pleading burdens shields conflicted transactions
Curtailing class actions reduces aggregate liability

These positions functionally insulate fiduciaries and insurers from accountability, contrary to ERISA’s protective purpose.

XI. Daniel Aronowitz’s Advocacy Further Demonstrates Conflict of Interest

The credibility of the “frivolous litigation” narrative is further undermined by the role of Daniel Aronowitz.

A. Prior Industry Role Creates Structural Conflict

Before his governmental role, Aronowitz was a leading figure in the fiduciary liability insurance industry—a sector that:

Directly profits from limiting litigation exposure
Prices risk based on expected claims frequency and severity
Benefits from procedural barriers that reduce claim viability

Policies restricting ERISA litigation therefore directly align with his prior industry interests.

B. Policy Positions Mirror Insurance Industry Objectives

Aronowitz has publicly advocated for:

Reducing “excessive” ERISA litigation
Increasing procedural barriers to participant claims
Rebalancing enforcement away from private suits

These positions track precisely with insurance industry priorities to reduce claim payouts and litigation risk, reinforcing the appearance—and reality—of a conflict of interest.

XII. Curtailing Participant Litigation Undermines ERISA’s Core Protective Function

ERISA was enacted in response to widespread pension abuses, with Congress concluding that:

Disclosure alone was insufficient
Administrative oversight was limited
Judicial enforcement was essential

Restricting participant access to courts would:

Weaken fiduciary accountability
Reduce deterrence of misconduct
Shift enforcement toward an already resource-constrained agency

In short, it would recreate the very conditions ERISA was designed to eliminate.

XIII. Conclusion

“A tyrant always has a pretext for his tyranny.” – Aesop

Aronowitz and the current EBSA certainly have no shortage of pretextual claims for their biased policies. EBSA’s attempt to justify restricting ERISA litigation as a response to “frivolous claims” is:

Contrary to statutory text, which guarantees access to federal courts;
Inconsistent with legislative history, which designates civil litigation as a primary enforcement mechanism;
Unsupported by empirical reality, given documented widespread violations; and
Tainted by conflict of interest, particularly in light of Aronowitz’s prior role in the fiduciary insurance industry.

The questionable trends in the EBSA’s recent policies, as well as the willful blindness involved, and the easily foreseeable harm that could result, justifies an urgent call for Congress to immediately exercise Congressional oversight over the DOL, the EBSA, and Aronowitz to ensure compliance with the agency’s stated purposes, acting in the best interests of plan participants and their beneficiaries by ensuring the rights and protections guaranteed under ERISA. The urgency is even greater given the fact that The DOL has apparently suspended the ERISA Advisory Council, an oversight which portentially could have addressed the very issues issues addressed herein and prevented the types of pretexts and betrayal cueently being seen at the DOL and EBSA/

Posted in fiduciary compliance | Leave a comment

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

Posted on March 15, 2026 by jwatkins

James W. Watkins, III, J.D., CFP Emeritus^TM, AWMA®
InvestSense, LLC

This post provides a fiduciary prudence analysis comparing a $100,000 non-SPIA immediate annuity paying 7% annually to a rolling / laddered 10-year U.S. Treasury note strategy yielding 4%, evaluated through terminal wealth at normal life expectancy for a 65-year-old female. The analysis is structured in a format commonly used in ERISA fiduciary breach evaluations and expert reports

I. ERISA Requires Evaluation of the Full Economic Consequences of an Investment

The fiduciary duties imposed by §404(a)(1) of the Employee Retirement Income Security Act of 1974 (ERISA) require fiduciaries to act:

Solely in the interest of plan participants and beneficiaries, and
With the care, skill, prudence, and diligence of a prudent expert.

Courts consistently interpret ERISA’s prudence requirement as a process-based inquiry focusing on whether fiduciaries appropriately evaluated the economic consequences of their decisions.

The Supreme Court in Tibble v. Edison International emphasized that ERISA fiduciaries must employ a “continuing duty to monitor investments and remove imprudent ones.” This duty necessarily requires a meaningful analysis of the economic characteristics of the investment, including cost and expected outcomes.

Similarly, Hughes v. Northwestern University reaffirmed that fiduciaries cannot rely on superficial characteristics of an investment option; instead, they must evaluate whether the option is prudent relative to available alternatives.

An evaluation of an immediate annuity that focuses solely on the nominal level of income payments, while ignoring terminal economic outcomes, fails to meet this prudence standard.

II. Income-Only Analysis Ignores a Critical Economic Variable: Terminal Wealth

An income-only analysis assumes that the sole objective of retirement assets is income maximization. That assumption is inconsistent with both economic reality and participant behavior.

Retirement assets typically serve three concurrent functions:

Consumption smoothing (retirement income)
Capital preservation
Contingency or legacy value

An immediate annuity evaluated only by its periodic payout ignores the opportunity cost of lost capital and therefore fails to measure the total economic trade-off imposed on participants.

The economically relevant metric is terminal wealth at life expectancy, which captures:

Cumulative income received, plus
remaining capital value.

Formally:

Where LE represents projected life expectancy.

A prudent fiduciary must evaluate whether the annuity produces superior economic outcomes relative to liquid alternatives when both income and remaining capital are considered.

III. Terminal Wealth Analysis Reflects Actual Participant Behavior

Behavioral finance research consistently demonstrates that retirees exhibit strong preferences for liquidity, flexibility, and capital preservation.

Participants rarely view retirement savings as a pure income stream. Instead, they treat retirement assets as a portfolio of income and reserve capital.

Income-only annuity analysis therefore fails to reflect participant utility, because it ignores:

bequest motives
emergency liquidity
longevity uncertainty
behavioral loss aversion.

Evaluating terminal wealth at projected life expectancy incorporates all three major participant objectives:

Participant Objective	Reflected in Terminal Wealth
Retirement income	Yes
Capital preservation	Yes
Flexibility/liquidity	Yes

An income-only analysis reflects only one dimension of participant utility.

IV. Income-Only Evaluation Systematically Masks the Economic Cost of Riders and Embedded Fees

In-plan immediate annuities frequently include guarantee riders or optional benefits designed to address behavioral concerns such as longevity risk or income floors.

However, these riders introduce substantial additional costs that reduce participant returns.

When evaluation focuses only on income levels, these costs become economically invisible, because:

higher payouts may reflect return of capital, not investment return
fees embedded in the annuity contract reduce terminal wealth but do not reduce stated income levels.

Thus, an income-only evaluation risks mischaracterizing fee-driven products as economically superior, despite inferior long-term outcomes.

A terminal wealth framework exposes these costs by directly measuring the net economic outcome experienced by the participant.

V. Breakeven and Terminal Wealth Analysis Are Consistent with Traditional Fiduciary Principles
Long-standing fiduciary principles derived from trust law emphasize economic equivalence and cost-benefit analysis.

A prudent fiduciary must evaluate whether an investment:

produces commensurate return relative to its cost, and
reaches breakeven within a reasonable time horizon.

Annuities inherently involve a mortality-credit trade-off, meaning that participants must survive long enough for cumulative payouts to exceed the initial premium.

A proper prudence analysis therefore requires evaluation of:

Breakeven age, and
Terminal wealth at life expectancy.

These metrics determine whether the annuity provides economic value relative to maintaining the same capital in a diversified investment portfolio.Fiduciary Framework

Under Employee Retirement Income Security Act of 1974 §404(a)(1)(B), fiduciaries must act:

With the care, skill, prudence, and diligence of a prudent expert
Based on risk-return characteristics of the investment
Considering participant outcomes and economic value

The prudence inquiry therefore requires evaluating:

Expected income stream
Return of participant capital
Terminal wealth available to participant or estate

Income-only comparisons are economically incomplete when evaluating products that irreversibly convert principal into mortality credits.

Courts applying ERISA prudence standards routinely analyze the economic value of the investment decision, not merely the cash-flow presentation.

Income-only comparisons are economically incomplete when evaluating products that irreversibly convert principal into mortality credits.

Courts applying ERISA prudence standards routinely analyze the economic value of the investment decision, not merely the cash-flow presentation.

VI. Demographic Assumptions

Mortality expectations are derived from U.S. female life tables published by the Social Security Administration.

Metric	Value
Age	65
Normal Life Expectancy	≈86 years
Evaluation Horizon	21 years

Thus:

Terminal wealth comparison occurs at age 86.

VII. Investment Alternatives

Strategy A

Immediate Annuity (Non-SPIA)

Premium: $100,000
Annual payout: 7%
Annual income: $7,000
Liquidity: None
Residual capital: $0

Total income received by life expectancy:

Terminal wealth:

Strategy B

Rolling / Laddered 10-Year Treasury Strategy

Assets invested in U.S. Treasury Note ladder.

Yield assumption:

4% annually
Capital preserved
Treasuries rolled at maturity

Future value calculation:

24681012141618205001000150020002500$2,653.30

Where:

PV = $100,000
r = 0.04
n = 21

Terminal wealth:

Income received over period:

VIII. Terminal Wealth Comparison

Strategy	Annual Income	Income to Age 86	Terminal Wealth	Total Economic Value
Immediate Annuity	$7,000	$147,000	$0	$147,000
Treasury Ladder	$4,000	$84,000	$227,000	$311,000

IX. Fiduciary Economic Evaluation
From a participant-centric economic perspective, the Treasury strategy produces:

Metric	Advantage
Annual income	Annuity +$3,000
Terminal wealth	Treasury +$227,000
Total economic value	Treasury +$164,000

Thus, although the annuity produces higher annual income, the participant forfeits principal and compounding.

The annuity only becomes economically superior if the participant materially exceeds normal life expectancy.

X. Breakeven Longevity
Breakeven occurs when cumulative annuity income equals Treasury terminal wealth.

Breakeven age:

Thus, the participant must live to approximately age 109 for the annuity to produce equivalent economic value.

XI. Behavioral Finance Considerations
Academic literature demonstrates retirees exhibit strong preference for capital preservation and bequest optionality.

Key concerns addressed by terminal wealth analysis:

loss aversion
estate preservation
liquidity risk
irreversibility of annuitization

The Treasury strategy preserves:

participant autonomy
liquidity
estate transfer potential.

XII. Fiduciary Prudence Implications
A prudent fiduciary comparing these alternatives would observe:

Annuity provides higher nominal income but destroys capital
Treasury strategy produces materially greater terminal wealth
Economic breakeven requires extreme longevity

Accordingly:

Selecting the annuity without evaluating terminal wealth implications risks violating ERISA prudence standards because the fiduciary would be ignoring a material economic dimension of the investment decision.

XIII. Litigation Significance
Failure to evaluate terminal wealth outcomes when considering annuity strategies may constitute:

procedural imprudence
failure to conduct a reasoned comparative analysis

Courts evaluating fiduciary conduct focus heavily on decision-making process rather than simply the outcome.

XIV. Expert Conclusion

At age 65 with a normal life expectancy of 86, the comparison demonstrates:

Treasury ladder strategy: ≈ $311,000 total economic value
Immediate annuity: ≈ $147,000 total value

Difference:

$164,000 in lost participant wealth.

A prudent fiduciary evaluating these options would therefore recognize that the annuity trades a modest income increase for a substantial destruction of terminal wealth, making it economically unfavorable for participants with normal life expectancy.

XV. Sensitivity Analysis
A sensitivity table on 3%, 4% and 5% terminal-wealth sensitivity analysis evaluating the rolling Treasury ladder strategy at 3%, 4%, and 5% yields compared with the 7% immediate annuity for a 65-year-old female evaluated through normal life expectancy (age 86; 21-year horizon).

Initial investment: $100,000

XVI. Sensitivity Analysis

Terminal Wealth at Life Expectancy (Age 86)

Future value of the Treasury ladder is determined using the compound growth relationship:

24681012141618205001000150020002500$2,653.30

Where

Treasury yield
years

Results Table

Strategy	Yield	Annual Income	Total Income to 86	Terminal Wealth	Total Economic Value
Immediate Annuity	7%	$7,000	$147,000	$0	$147,000
Treasury Ladder	3%	$3,000	$63,000	$186,000	$249,000
Treasury Ladder	4%	$4,000	$84,000	$227,000	$311,000
Treasury Ladder	5%	$5,000	$105,000	$279,000	$384,000

Incremental Economic Advantage vs. Annuity

Treasury Yield	Treasury Economic Value	Advantage vs. Annuity
3%	$249,000	+$102,000
4%	$311,000	+$164,000
5%	$384,000	+$237,000

XVII. Key Observations
1. Treasury Strategy Dominates Across the Yield Range

Even at a low yield environment of 3%, the Treasury strategy produces:

≈ $102,000 more participant wealth than the annuity by life expectancy.

2. Income Advantage of the Annuity is Modest

Yield	Income Gap vs Annuity
3%	-$4,000/year
4%	-$3,000/year
5%	-$2,000/year

The incremental income benefit of the annuity is relatively small compared with the large destruction of terminal capital.

3. Compounding Drives Economic Dominance
The compounding effect over 21 years dramatically increases retained capital.

Terminal capital preserved:

Yield	Capital Remaining
3%	$186,000
4%	$227,000
5%	$279,000

The annuity leaves no residual capital.

XVIII. Fiduciary Prudence Implications
From a fiduciary process standpoint under Employee Retirement Income Security Act of 1974, this sensitivity analysis shows:

The relative economic inferiority of the annuity is robust to interest-rate assumptions.
Across plausible Treasury yields, the annuity systematically sacrifices participant terminal wealth.

Thus, a prudent fiduciary evaluating these alternatives should recognize that:

the annuity represents a conversion of participant capital into mortality credits, and
absent extraordinary longevity, the product produces lower lifetime economic value.

XIX Litigation Significance

Sensitivity analysis is frequently used in fiduciary litigation to demonstrate robustness of the damages model. Here, the result is stable. Even under conservative interest rate assumptions, the Treasury ladder materially outperforms the annuity in terminal wealth outcomes.

Mortality weighted expected wealth model.
Below is a mortality-weighted expected wealth model comparing a $100,000 immediate annuity paying 7% with a rolling Treasury ladder strategy at 4%, evaluated for a 65-year-old female using survival probabilities through normal life expectancy.

This framework is widely used in retirement economics because it integrates longevity risk and terminal wealth, allowing fiduciaries to evaluate expected participant economic outcomes, rather than simple cash-flow comparisons.

Mortality probabilities shown here are based on actuarial life tables published by the Social Security Administration.

XX. Mortalituy Model Structure
Expected wealth is calculated as the probability-weighted value of wealth in each survival state.

E(W)=\sum_{t} P(s_t)W_t

Where

= probability participant survives to age
= cumulative wealth realized at age

This framework reflects the reality that:

annuity benefits depend on survival
Treasury wealth exists regardless of survival

XXI. Mortality Distribution (Female Age 65)

Approximate survival probabilities:

Age	Survival Probability
70	0.95
75	0.89
80	0.79
85	0.63
90	0.40
95	0.18
100	0.05

Normal life expectancy ≈ 86 years.

XXII. Economic Value by Age

Immediate Annuity

Annual payment:

Cumulative income:

Age	Years	Cumulative Income
70	5	$35,000
75	10	$70,000
80	15	$105,000
85	20	$140,000
90	25	$175,000
95	30	$210,000
100	35	$245,000

Terminal wealth:

Treasury Ladder (Future value relationship):

24681012141618205001000150020002500$2,653.30

Assuming income is withdrawn annually but capital compounds.

Age	Capital Value
70	$121,700
75	$148,000
80	$180,000
85	$219,000
90	$267,000
95	$325,000
100	$395,000

XXIII. Mortality-Weighted Expected Wealth

Expected wealth contribution =

Immediate Annuity

Age	Survival Probability	Income Value	Weighted Value
70	0.95	$35,000	$33,250
75	0.89	$70,000	$62,300
80	0.79	$105,000	$82,950
85	0.63	$140,000	$88,200
90	0.40	$175,000	$70,000
95	0.18	$210,000	$37,800
100	0.05	$245,000	$12,250

Expected wealth

≈ $386,750

Treasury Strategy

Age	Survival Probability	Wealth Value	Weighted Value
70	0.95	$121,700	$115,600
75	0.89	$148,000	$131,700
80	0.79	$180,000	$142,200
85	0.63	$219,000	$138,000
90	0.40	$267,000	$106,800
95	0.18	$325,000	$58,500
100	0.05	$395,000	$19,750

Expected wealth

≈ $712,550

XXIV. Mortality-Weighted Economic Comparison

Strategy	Expected Wealth
Immediate Annuity	$386,750
Treasury Ladder	$712,550

Difference:

≈ $325,800 higher expected participant wealth for the Treasury strategy.

XXV. Economic Interpretation

The mortality-weighted model demonstrates three key principles:

1. Annuities Only Win in Extreme Longevity States
The annuity produces higher value only in the far right tail of the longevity distribution.

Those states have low probability.

2. Treasury Strategy Dominates Most Survival Outcomes
Because capital is preserved and compounds:

wealth exists in both survival and death states
estate value is retained.

3. Mortality Credits Are Overpriced
The annuity converts principal into longevity insurance. However, the actuarial value of those credits is smaller than the lost capital compounding under realistic mortality distributions.

XXVI. Fiduciary Implications

Under the prudence standard of the Employee Retirement Income Security Act of 1974, fiduciaries evaluating retirement income products should consider:

longevity risk
capital preservation
expected participant economic outcomes.

The mortality-weighted model shows that the Treasury strategy produces substantially greater expected wealth.

Failure to evaluate such economic outcomes may indicate procedural imprudence, because a fiduciary would be ignoring probability-weighted economic consequences of annuitization.

XXVII. Expert Conclusion (For a 65-year-old female):

Strategy	Expected Wealth
Immediate Annuity	$386k
Treasury Strategy	$713k

The Treasury strategy produces approximately 84% greater expected economic value.

Thus, when mortality probabilities are incorporated, the annuity’s apparent income advantage is outweighed by lost capital and compounding.

XXVIII. Application of Fiduciary Duty Principles

A. Tibble Monitoring Obligation

In Tibble v. Edison International, the Supreme Court held that fiduciaries have a continuing duty to monitor plan investments and remove imprudent ones.

If a plan sponsor:

learns that an alternative investment provides equal or greater benefits at lower participant cost or risk

failure to replace the inferior option may constitute a breach.

Here:

annuities provide income only
alternatives provide income + capital preservation

Thus the annuity becomes a dominated option.

B. Hughes Standard

In Hughes v. Northwestern University, the Court rejected the argument that fiduciaries satisfy their duty merely by offering a large menu of options.

Instead, fiduciaries must ensure each option is prudent.

Therefore: The presence of superior alternatives does not excuse the inclusion of inferior ones

XXIX. Going Forward
A fiduciary evaluation of an in-plan immediate annuity that relies solely on periodic income levels is economically incomplete and inconsistent with ERISA’s prudence standard.

Because retirement assets serve multiple economic functions—including income generation, capital preservation, and financial flexibility—the appropriate evaluation metric is terminal wealth at projected life expectancy.

Terminal wealth analysis:

captures the full economic trade-off inherent in annuitization,
reveals the true cost of riders and embedded fees, and
aligns with both participant behavior and fiduciary principles of prudent process.

Accordingly, a prudent fiduciary process must evaluate immediate annuities based on terminal wealth outcomes at life expectancy, rather than relying solely on nominal income payments.

Posted in fiduciary compliance | Tagged 401k, 401k plans, ERISA, fiduciary law, Fiduciary prudence, fiduciary risk management, fiduciaryliability, plan sponsor | Leave a comment

The Active Management Value Ratio as a Cost-Benefit Framework: Integrating AI into Fiduciary Prudence Analysis

Posted on March 1, 2026 by jwatkins

James W. Watkins, III, J.D., CFP Emeritus^TM, AWMA®
InvestSense, LLC

I. Executive Summary
Several years ago, I created a simple metric, the Active Management Value Ratio™ (AMVR). Since studies have shown that people are more visually oriented than verbally oriented, the AMVR is a visual representation of the research and concepts of investment icons such as Nobel laureate Dr. William F. Sharpe, Charles D. Ellis, and Burton G. Malkiel. The AMVR also incorporates the research of professor Ross Miller of the State University of New York, creator of the Active Expense Ratio.

The best way to measure a manager’s performance is to compare his or her return with that of a comparable passive investment.1

So, the incremental fees for an actively managed fund relative to its incremental returns shoud always be compared to the fees for a comparable index fund relative to its returns. When you do this, you’ll quickly see that the incremental fees for active management are really, really high – on average, over 100 of incremental returns.2

Past performance is not helpful in predicting future returns. The two variables that do the best job in pedicting future performance [of mutual funds] are expense ratios and turnover.3

Under fiduciary standards of prudence, investment decisions must reflect a reasoned evaluation of costs relative to expected benefits, assessed in the context of risk, diversification, and portfolio objectives.

The Active Management Value Ratio (AMVR) is best understood as a structured cost-benefit test:

Benefit = Incremental risk-adjusted return attributable to active management

Cost = Incremental correlated-adjusted costs required to obtain that return

Decision Metric = Whether correlation-adjusted incremental cost exceeds incremental risk-adjusted return.

Unlike simplistic comparisons of nominal return and expense ratios, AMVR incorporates:

Incremental return (above a passive alternative)

Risk-adjusted return (e.g., alpha)

Cost net of correlated portfolio effects

AMVR aligns directly with fiduciary duty principles emphasizing prudence, reasonableness, and process discipline

II. Fiduciary Framework
Under longstanding fiduciary principles (including those applied under ERISA jurisprudence and trust law), prudence requires:

A reasoned decision-making process
Evaluation of alternatives
Cost awareness
Risk consideration
Diversification and portfolio context

Critically, fiduciary law does not require selection of the lowest-cost option. It requires selection of options whose costs are justified by expected benefits, evaluated in context.

Thus, a proper fiduciary analysis must address:

Do the incremental expected benefits of active management justify its incremental costs, after accounting for risk?

AMVR addresses this question and provides a legally effective and jusifiable process.

III. AMVR as a Structured Cost-Benefit Analysis

The AMVR can be expressed conceptually as:

AMVR=Incremental Correlation-Adjusted Cost divided by Incremental Risk- Adjusted Return. The goal is an AMVR equalto or less then 1.00.

Where:

Incremental Return = Active return above passive alternative.
Risk Adjustment = Adjustment for volatility, tracking error, drawdown risk, or factor exposure.
Correlation-Adjusted Cost = Recognition that costs and returns are not independent,

This mirrors traditional cost-benefit analysis used in economics and capital budgeting.

B. Why Nominal Return Comparisons Are Inadequate
A nominal comparison:

Active return: 8%
Passive return: 7%
Active fee: 0.80%
Passive fee: 0.05%

The foregoing data superficially suggests:

“Active outperformed by 1% and costs 0.75% more.”

But this scenario ignores:

Volatility differences
Downside capture
Tracking error
Diversification effects within the total portfolio
Correlation between cost drag and return variability

Nominal comparisons treat return and cost as static and independent. In reality, they are probabilistic and correlated.

IV. Incremental Risk-Adjusted Return: The Proper Benefit Measure

A. Incremental, Not Absolute

The relevant question is not:

Did the manager produce a high return?

But rather:

Did the manager produce incremental return relative to a comparable passive alternative?

Active strategies often introduce:

Higher volatility
Concentration risk
Factor tilts
Tracking error
Tail risk

Therefore, benefit must be measured as:

Alpha net of systematic exposures
Risk-adjusted metrics
Downside-adjusted performance

Risk-adjusted metrics better reflect:

Expected utility to beneficiaries
Probability distribution of outcomes
Portfolio-level contribution

A fiduciary cannot prudently evaluate benefits without adjusting for risk.

V. Correlation-Adjusted Costs: The Proper Cost Measure

A. Costs Are Not Independent of Returns

Active management costs include:

Explicit fees, e.g., expense ratios
Trading costs
Tax impact
Cash drag
Market impact

But more importantly:

These costs interact with volatility and turnover
Higher risk strategies often incur higher implementation costs

Thus, cost is probabilistic and performance-linked.

B. Incremental Cost Must Be Measured Relative to Viable Passive Alternatives

The proper cost comparison requires the use of a fund’s Incremental Correlation-Adjusted Cost (ICAC)

ICAC=Active Total Cost−Passive Total Cost

Including:

Expense ratio differential
Turnover-related transaction costs
Implementation shortfall

This produces a more accurate assessment of the economic burden (costs) imposed on beneficiaries.

VI. Portfolio Context: Fiduciary Relevance

An active manager may:

Improve diversification
Reduce drawdown risk
Provide crisis alpha
Offset other factor exposures

AMVR, by incorporating risk-adjusted incremental return, implicitly captures:

Portfolio-level covariance effects
Diversification benefits
Marginal contribution to risk

Nominal comparisons do not/cannot capture these effects.

VII. Alignment With Fiduciary Standards

The AMVR framework aligns with fiduciary prudence because it:

1. Is Comparative
Evaluates active performance against a reasonable passive alternative.

2. Is Risk-Aware
Adjusts expected benefit for volatility and downside risk.

3. Is Cost-Conscious
Incorporates incremental and correlated costs.

4. Is Portfolio-Oriented
Reflects contribution to total portfolio risk and return.

5. Is Process-Driven
Provides a replicable, documented analytical method.

AMVR formalizes an objective, defensible decision-making process.

VIII. Why AMVR Is More Meaningful Than Nominal Return/Fee Comparisons

Nominal Comparison	AMVR Framework
Looks at raw return	Looks at incremental return
Ignores volatility	Adjusts for risk
Compares fee ratios only	Compares total incremental cost
Ignores portfolio impact	Evaluates marginal portfolio contribution
Static and backward-looking	Probabilistic and forward-looking

Nominal comparisons answer:

“Was the return higher than the fee?”

AMVR answers:

“Did beneficiaries receive adequate risk-adjusted incremental benefit for the incremental economic burden imposed?”

Only the latter reflects fiduciary reasoning.

IX. Legal Defensibility
In litigation or regulatory reviews, fiduciaries must demonstrate:

Consideration of viable alternatives
Analysis of cost relative to benefit
Awareness of risk characteristics
A reasoned, documented process

A documented AMVR analysis demonstrates:

Objective evaluation
Benchmark-relative reasoning
Risk consideration
Economic rationality

This materially strengthens procedural prudence defensibility.

X. Conclusion
The Active Management Value Ratio is not an exotic performance statistic. It is a structured, fiduciary-relevant cost-benefit analysis using incremental risk-adjusted returns and correlated incremental costs.

Its utility of the AMVR lies in:

Measuring benefit properly (risk-adjusted, incremental)
Measuring cost properly (incremental, correlated, total)
Evaluating both within portfolio context

By contrast, simple nominal return and fee comparisons are incomplete and potentially misleading because they ignore risk, correlation, and portfolio effects.

For fiduciaries charged with acting solely in the interest of beneficiaries, AMVR provides a more economically coherent, legally defensible, and analytically rigorous framework for evaluating active management.

Section Three

Integrating AI to Level the Playing Field
Undeer ERISA 404(a), a plan sponsor has a fiduciary duty to independently investigate, and select each invesment option offered within an ERISA plan. Properly designed and implemented, AI can make those processes much easier for a plan sponsor and other investment fiduciaries. AI can provide evidence of a prudent process and a proactive and effective fiduciary risk management program.

Professor Ross Miller, creator of the Active Expense Ratio metric, explains the importance of the metric in investing, especially fiduciary investing, as follows:

Mutual funds appear to provide investment services for relatively low fees because they bundle passive and active funds together in a way that understates the true cost of active management. In particular, funds engaging in ‘closet’ or ‘shadow’ indexing, charge their investors for active maangement while providing them with little more than an indexed investment. Even the average mutual fund, which ostensibly provides only active management, will have 90% of the variance in its returns explained by its benchmark index.4

The quality of any AI query depends on the quality of the prompts used to define the query. The following is the sample query that we recommend to our fiduciary risk management clients in using the Active Management Value Ratio:

Prepare a fiduciary prudence cost benefit analysis comparing FCNKX and FXIAX, for the most recent five year period ending December 31, 2025,with incremental risk-adjusted returns calculated using the Modigliani measure, and incremental correlation-adjusted costs,calculated using Miller’s Active Expense Ratio, using an r-squared score of 97, with results presented in tabular form.

Unfortunately, AI is susceptible to the same “garbage in, garbage out” issues as computer asset allocation programs. While my AI expereince has been very positive in terms of accuracy, I have noticed more AI mistakes in misquoting nominal fund expenses ratios than any other area. Investment fiduciaries can verify data used in calculating correaltion-adjusted cost by visiting the Portfolio Visualization site (portrfoliovisualization.com) or by submitting a simple AI query itself in order to ensure accuracy of the data

Using the AI prompt shown above resulted in the following data and analysis:

Methodology Recap

Active Expense Ratio (AER) – Allocates the excess cost paid for active management to only the portion of returns that can be considered truly active (i.e., not explained by the benchmark). The formula is:

AER=Incremental Cost divided by Miller’s Active Weight metric

Where:

Incremental Cost = Correlation-adjusted active fund expense – Index fund expense
Active Weight (AW) ≈ 1 – √(R‑squared), per Miller’s proxy for the non‑explained return portion relative to the benchmark

This mirrors the logic that a high r‑squared implies most return variation is explained by the benchmark, leaving a small active portion that investors are paying for.(fiduciaryinvestsense.com) The resulting AMVR chart appears below

Key Inputs

Parameter	FCNKX	FXAIX
Expense Ratio	~0.56% ‑ ~0.74%¹	~0.02%‑0.03%²
Benchmark	S&P 500	S&P 500
R‑Squared vs FXAIX	0.94 (given)	n/a
Incremental Cost	0.54% (given)	n/a

Multiple data sources on FCNKX list the fund’s expense ratio in the ~0.56%‑0.74% range. FXAIX’s expense ratio is widely reported at ~0.015%‑0.03%. Here the expense ratios used were 56 basis points (0.56) for FCNKX and 3 basis points (0.03) for FXAIX.

Active Weight (AW) (proxy):

\AW=1 – \sqrt of r-squared{0.94} ≈ 1 – 0.97 ≈ 0.03 (or ~3.0% active)}

Analysis Results (Five‑Year Ending Dec 31 2025)

Metric	Calculation	Result
Active Weight (AW)	1 − √(0.94)	~3.0 %
Incremental Cost	FCNKX ER − FXAIX ER	0.54 %
Miller Active Expense Ratio	0.54 % ÷ 0.03	~18.0 %

Comparative Table

Fund	Published ER (Annual)	Incremental Cost vs FXAIX	Active Weight	Miller AER (Implicit Active Cost)
FCNKX	~0.56%‑0.74%	0.54%	~3.0%	~18.0 %
FXAIX	~0.02%‑0.03%	n/a	n/a	—

Interpretation
Active Weight of ~3 % implies that, based on the r‑squared of 0.94, approximately 97 % of FCNKX’s returns over this period move in line with the S&P 500 benchmark. The remaining ~3 % constitutes the active component of returns that might reflect stock‑selection or timing decisions.

Incremental Cost of 0.54 % reflects FCNKX’s excess fee over FXAIX, which represents the implicit price investors pay for active management.

When this incremental cost is allocated to only the active component via Miller’s AER measure:

FCNKX’s AER ≈ ~18 %

This means that investors are effectively paying approximately 18 % per year (or ~1,800 bps) for each unit of active contribution in FCNKX over this five‑year period.

This highlights a substantially higher effective cost of active management than the published headline fee — a central insight in fiduciary cost‑benefit debates about “closet indexing” and active fee justification.

Fiduciary Perspective
Cost Efficiency: FXAIX’s extremely low published expense ratio (≈0.02 %‑0.03 %) makes it a cost‑efficient proxy for S&P 500 exposure.

Active Contribution: FCNKX’s high r‑squared implies a small active component, so the true cost per unit of active exposure is very high, per the AER metric.

Implication: Fiduciaries evaluating fund costs relative to value added may find it difficult to justify the active fee premium of FCNKX given its modest active weight, especially when a low‑cost index alternative like FXAIX provides broad market exposure with far lower implicit costs.

A properly conducted fiduciary cost-benefit prudence analysis can alert a plan sponsor and other investment fiduciaries, e.g., trustees, to potential “red flags” of potential fiduciary liability traps, e.g., a high r-squared score combined with an actively managed fund’s high incremental cost numbers. Properly utilized, AI can significantly and effectively minimize a plan sponsor’s potential fiduciary risk liability exposure.

Since an AMVR > 1.00 indicates that a fund’s incremental costs exceed it incremental return, the sample AMVR here indicates that FCNKX is an imprudent investment choice relative to FXAIX. A simple cost-benefit analysis can be very informative, especially one such as the AMVR, which raises the bar to conform to the higher standards demanded under fiduciary law.

Summary – Risk‑Adjusted Perspective

Published Expense Ratios > 0.56 -0.74 (FCNKX), ).02-0.03 (FXAIX)
Investment Cost > 0.54 (FCNKX) (used for AER)
R-squared > 0.94 (high correlation implies small active component)
Active Weight > 3.0% (proxy for actual active contribution)
Miller AER > 18.0% (cost of active risk relative to explained return)

1. FXAIX Exhibits Superior Risk‑Adjusted Returns:
Across multiple, widely used ratios (here, the Modigliani measure was used), FXAIX delivered better risk‑adjusted performance than FCNKX over the trailing five years, indicating that for each unit of risk taken, the index fund tended to generate more return.

2. FCNKX Carries Higher Volatility:
FCNKX shows higher standard deviation and larger historical drawdowns, meaning more pronounced swings in investor outcomes during adverse markets.

3. High Implied Active Cost with Lower Adjusted Returns:
When combined with the Miller AER result (~18.0%), FCNKX appears to charge significantly more for active management, without commensurate risk‑adjusted benefits relative to FXAIX. This is relevant for fiduciary reviews emphasizing both cost and outcome efficiency.

The AMVR provides a structural process, one that is sound and legally defensible. The utility of the AMVR is that the metric transforms the active-passive debate into a familiar economic exercise: cost-benefit analysis, one that results in the correct analytical question for investment fiduciaries NOT being based solely on the level of fees, but rather:

Does active management provide a sufficient incremental risk-adjusted benefit to justify its incremental correlation-adjusted cost?

Fortunately, artificial intelligence helps makes it easier to answer that question and analyze viable alternative fiduciary prudence scenarios in order to effectively minimize unnecessary and unwanted fiduciary liability exposure.

The resulting AMVR fiduciary prudence analysis clearly established the imprudence of FCNKX relative to FXAIX for the time period studied.

Notes
1. William F. Sharpe, “The Arithmetic of Active Investing,” available online t https://web.stanford.edu/~wfsharpe/art/active/active.htm.
2. Charles D. Ellis, “Letter to the Grandkids: 2 Essential Investing Guidelines” https://www.forbes.com/sites/investor/2014/03/13/letter-to-the-grandkids-12-essential-investing-guidelines/#cd420613736c.
3. Burton G. Malkiel, “A Random Walk Down Wall Street,” 11th Ed., (W.W. Norton & Co., 2016), 460.
4. Ross Miller, “Evaluating the True Cost of Active Management by Mutual Funds,” Journal of Investment Management, Vol. 5, No. 1, 29-49 (2007). https://papers.ssrn.com/sol3/papers.cfm?abstract_id=746926.

Posted in fiduciary compliance | Tagged 401k, compliance, ERISA, fiduciary investing, fiduciary law, fiduciary liability, Fiduciary litigation, fiduciary responsibility, fiduciary risk management, plansponsors, risk management | Leave a

Posted in fiduciary compliance | Tagged 401k, ERISA, fiducairy risk management, fiduciary, fiduciary law, fiduciary liability, Fiduciary litigation, Fiduciary prudence, fiduciary risk management, investment, personal-finance, plansponsors | Leave a comment

Battle of the Best Interests – Whose Are the EBSA and the DOL Supposed to Serve, and Whose Are They Really Serving?

Posted on February 5, 2026 by jwatkins

Thesis
The Employee Benefit Security Administration’s (EBSA) recent shift to interpreting ERISA in terms of procedural prudence to the exclusion of substantive trust law is inconsistent with the stated purpopse and goals of ERISA, as revealed in the Act’s legislative history, and raises concerns about potential conflicts of interest within the EBSA, given the fact that the EBSA has recently adopted a procedural approach in enforcing ERISA. A procedural approach is clearly more friendly to the interests of the insurance indusry at the expense of plan participants, as it promotes a simplistic check-in-the-box approach rather than a substantive analysis based on trust law, an analysis that focuses on actual protection of the rights and protections guaranteed under ERISA. The EBSA’s position falsely suggests that fiduciary prudence is an either-or proposition, while fiduciary prudence under ERISA actually requires consideration of both procedural and substantive prudence.

The Employee Retirement Income Security Act of 1974 (ERISA) was designed as a remedial statute to protect therights and interests of participants in employee benefit plans and their beneficiaries. Central to this protection is the “prudent man” standard of care, which the Supreme Court has repeatedly noted is rooted in the common law of trusts.¹ However, recent shifts in the Department of Labor’s Employee Benefits Security Administration (EBSA) toward a procedural interpretation of fiduciary duty—whereby the legal prudence of a fiduciary’s actions are judged almost exclusively by the process followed rather than the substantive outcome—threaten to undermine the Act’s core purpose and goals

The EBSA’s position falsely suggests that fiduciary prudence is an either-or proposition, while fiduciary prudence under ERISA actually requires consideration of both procedural and substantive prudence.This analysis argues that an exclusive focus on proceduralism is inconsistent with ERISA’s legislative history, ignores the dual nature of fiduciary prudence, and creates a regulatory environment that favors the insurance industry over plan participants and at the expense of both plan participants and their beneficiaries.

The Legislative Intent and the Common Law of Trusts
When Congress drafted ERISA, it did not create fiduciary standards in a vacuum. As noted in Boggs v. Boggs^[2], the statutory language was intended to “codify the common law of trusts” to define the scope of fiduciary liability.^[3] The legislative history of ERISA, specifically the Senate Committee reports, emphasizes that the Act’s fiduciary rules were meant to provide “the same degree of protection to each participant” regardless of the type of plan.

In the common law of trusts, a trustee is held to a standard of “substantive reasonableness.”^[4] It is not enough for a trustee to simply document a meeting; the resulting investment or benefit determination must be one that a “prudent man acting in a like capacity” would make.^[5]By shifting toward a “check-the-box” procedural approach, the EBSA risks decoupling the fiduciary duty from its historical foundation in trust law, where the “sole interest” rule (the duty of loyalty) and the “prudent man” rule (the duty of care) function as substantive safeguards against mismanagement.^[6]

II. ERISA’s Legislative Purpose Rejects Pure Proceduralism
ERISA was enacted to address “the inadequacy of current safeguards” protecting employee benefit plan participants and beneficiaries and to establish “standards of conduct, responsibility, and obligation for fiduciaries.”^[7] ERISA § 2(b). Congress’s concern was not merely that fiduciaries follow formal decision-making steps, but that plan participants’ benefits be substantively protected from imprudent, disloyal, or unreasonable fiduciary conduct.

A purely procedural conception of prudence is inconsistent with this purpose for three reasons:

1. ERISA was designed as a remedial statute, to be construed broadly in favor of protecting plan participants.
2. Congress deliberately borrowed from the common law of trusts, which has never treated prudence as satisfied by process alone.
3. The statute imposes outcome-oriented duties, such as acting “solely in the interest” of participants and for the “exclusive purpose” of providing benefits, which cannot be meaningfully assessed without substantive evaluation.

If fiduciary compliance could be established solely by documenting a decision-making process, regardless of the reasonableness of the resulting decision, ERISA’s protective objectives would be substantially undermined.

III. ERISA § 404 Incorporates Substantive Trust Law, Not Procedural Safe Harbors
ERISA § 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 is drawn directly from trust law and reflects a unitary prudence standard that encompasses both process and substance.

Under traditional trust principles:

(1) A prudent process is necessary but not sufficient.

(2) Courts evaluate whether a fiduciary’s decision was reasonable in light of the information available, the purposes of the trust, and the interests of beneficiaries.

(2) Even a procedurally careful decision may be imprudent if it produces substantively unreasonable results.

Trust law has never recognized a regime in which fiduciaries may escape liability simply by following formal procedures while making decisions no prudent fiduciary would make.

The False Dichotomy: Procedural vs. Substantive Prudence
The EBSA’s recent interpretive trends suggest a false dichotomy: that a fiduciary must be either procedurally prudent or substantively prudent. In reality, ERISA jurisprudence has historically required both. As George Gleason Bogert explains in his seminal treatise on trusts, “the duty of investigation (procedure) is a prerequisite to, but not a substitute for, the duty of sound judgment (substance).^[8]

If a fiduciary follows a rigorous process but ultimately selects an insurance product or other investment with exorbitant fees or poor stability that no reasonable expert would choose, the “procedural” defense should fail. The “prudent man” standard under ERISA29 U.S.C. § 1104(a)(1)(B) requires the fiduciary to act with the “care, skill, prudence, and diligence” that a “prudent man acting in a like capacity” would use.^[9] This is an objective standard. A purely procedural approach allows fiduciaries to hide behind “consultant reports” and “committee minutes” while ignoring the substantive reality that the plan’s assets are being eroded by conflicted insurance and other investment products.^[10]

EBSA’s newly announced procedural framing rests on a false dichotomy: that fiduciary prudence must be assessed as either procedural or substantive. Trust law—and ERISA by design—rejects this framing.

A sound fiduciary analysis asks:

Did the fiduciary engage in a reasoned and informed decision-making process?
Did that process lead to decisions a prudent fiduciary could reasonably make under the circumstances?

These inquiries are complementary, not mutually exclusive. Process informs substance; substance tests the adequacy of process. Eliminating substantive review collapses fiduciary prudence into a compliance exercise rather than a protective standard.

Proceduralism as a Shield for the Insurance Industry
The shift toward a procedural approach is particularly advantageous for the insurance and financial services industries. Insurance companies often act as service providers or de facto fiduciaries to ERISA plans. A proceduralist regulatory environment allows these entities to standardize “compliance packages” that emphasize the appearance of diligence.^[11]

When the EBSA prioritizes the “process” of selecting an annuity or another investment tier, it shifts the burden of proof. Instead of the insurer having to prove the substantive fairness of a transaction, the participant must prove a “procedural defect.” This creates a “safe harbor” for the insurance industry, where, as long as the paperwork is in order, the substantive merits of the deal—such as the hidden “spread” in insurance contracts or the lack of transparency in “bundled” services—remain unexamine^.] This “check-the-box” methodology directly contradicts the “highest duty known to the law” that ERISA fiduciaries are supposed to uphold.

Conflicts of Interest and Regulatory Capture
The EBSA’s move toward proceduralism raises significant concerns regarding regulatory capture. “Regulatory capture” refers to a scenario where a special interest is prioritized over the general interests of the public, leading to a net loss for society.The insurance industry maintains a powerful lobby that advocates for “certainty” and “clear guidelines”—euphemisms for rules that limit liability to easily satisfied procedural hurdles. By adopting a procedural interpretation that excludes substantive trust law, the EBSA effectively reduces the risk for insurers while increasing the risk for plan participants.

This shift ignores the “exclusive purpose” rule of ERISA^[12[, which mandates that fiduciaries act solely for the benefit of participants. If the EBSA’s interpretive framework makes it easier for fiduciaries to favor insurance-linked products that provide rebates or “financial incentives” to the plan sponsor, provided a “process” was followed, the agency is failing its statutory mandate. The legislative history of ERISA explicitly warns against “self-dealing” and “conflicts of interest,” yet a procedural approach to ERISA provides a veil for these very issues.^[13]

The Battle of the Best Interests
Whose best interests – the insurance industry’s or the plan participant’s – are better served by the EBSA’s recent adoption of a procedural approach in interpreting ERISA to the exclusion of substantive trust law?

The recent shift by the Employee Benefits Security Administration (EBSA) and the Department of Labor (DOL) toward a procedural interpretation of the Employee Retirement Income Security Act (ERISA) is widely viewed by legal scholars and trust law experts as primarily serving the interests of the insurance industry and financial service providers, typically at the expense of plan participants.

By prioritizing “procedural prudence”—the adherence to a set of bureaucratic steps—over “substantive trust law”—the objective quality of the investment outcome—the regulatory framework provides a “safe harbor” for industry practices that may be fundamentally detrimental to the retirement security of plan participants and their beneficiaries..

The Shield of Proceduralism for the Insurance Industry
A procedural approach allows insurance companies and plan fiduciaries to insulate themselves from liability by demonstrating that they followed a “reasoned process,” regardless of whether that process led to a poor result for the participant.^[1] ^[2]

The “Herd Mentality” Defense: Under a proceduralist framework, if an insurance company provides a product that is “consistent with industry standards,” it is often deemed prudent. This benefits the insurance industry because it allows for the proliferation of high-fee products, such as certain annuities or retail-class mutual funds, as long as the fiduciary can show they “benchmarked” these products against other similarly high-priced industry offerings.

Safe Harbors and Annuity Selection: Recent EBSA interpretations and legislative shifts (such as the SECURE Act) have created safe harbors for the selection of annuity providers. These safe harbors focus on the fiduciary’s review of the insurer’s financial representations rather than a substantive guarantee of the product’s value. This benefits insurers by reducing their exposure to litigation when products fail to perform, as the “process” of selection becomes the legal finish line.

Reduced Judicial Scrutiny: Proceduralism encourages the use of the “arbitrary and capricious” standard of review. This standard is highly deferential to plan administrators (often insurance companies in the context of disability or life insurance claims). As long as the administrator can point to a procedural trail, courts are frequently barred from questioning the substantive fairness of a claim denial.^[2] ^[8]

The Erosion of Participant Protections
For plan participants, the exclusion of substantive trust law principles represents a significant loss of protection. Traditional trust law is generally considered “paternalistic”in the best sense—it is designed to protect the beneficiary from both the incompetence and the self-interest of the trusteeand other investment fiduciaries.

Loss of the “Sole Interest” Rule: Substantive trust law requires that a fiduciary act for the exclusive purpose of providing benefits.^[14] A procedural approach weakens this by allowing “dual-purpose” actions—where a choice benefits both the participant and the service provider—as long as the process was “prudent.” This often leads to the inclusion of proprietary insurance products in 401(k) lineups that may not be the best available in the market.

The “Process over Outcome” Fallacy: Under a substantive framework, a fiduciary is judged by the objective reasonableness of an investment. If a participant loses a significant portion of their savings to hidden fees, a substantive approach would find the fiduciary liable for failing to secure the best available rate. Under EBSA’s proceduralist leanings, if the fiduciary can show they held three meetings and looked at a spreadsheet before choosing the high-fee option, the participant often has no legal recourse.

Information Asymmetry: The insurance industry possesses vast information advantages over the average plan participant. Substantive trust law accounts for this by placing the burden on the expert (the fiduciary) to ensure a “correct” outcome. Proceduralism, however, assumes that if the “rules of the game” were followed, the outcome is valid, leaving the participant to bear the economic consequences of “procedurally correct” but substantively poor decisions.

The Mathematical Necessity of Substantive Review
From an economic and actuarial perspective, the “proceduralism” shift is devastating to long-term retirement security. Consider the impact of fees on a retirement balance over 30 years. If a proceduralist approach allows a fee f1 that is 100 basis points higher than a substantive market rate f2, the loss to the participant is:Loss=P(1+r−f2)ⁿ−P(1+r−f1)ⁿ , where P is the principal, r is the rate of return, and n is the number of years. Over 30 years, a 1% difference in fees can reduce a final account balance by nearly 25%.^[1]

A proceduralist approach treats this 25% loss as “legal” as long as the process was followed. A substantive trust law approach views this as a failure of the fiduciary’s duty to protect the plan’s assets.^[15]

Supreme Court Precedent Confirms Prudence Is Not a Procedural-Only Inquiry
Supreme Court ERISA jurisprudence consistently treats fiduciary prudence as a mixed inquiry, rejecting the notion that process alone resolves the analysis.

These cases confirm that ERISA fiduciary prudence is not satisfied by procedural box-checking divorced from substantive evaluation.

Donovan v. Bierwirth^[15] established that fiduciaries must act with “an eye single to the interests of participants,” a standard that necessarily involves substantive judgment.

Fifth Third Bancorp v. Dudenhoeffer^[16]emphasized that fiduciary conduct must be evaluated under “the circumstances then prevailing,” not reduced to categorical procedural compliance.

Tibble v. Edison International^[17] reaffirmed the continuing duty to monitor investments, which necessarily requires substantive reassessment of whether existing options remain prudent.

Hughes v. Northwestern University^[18] rejected arguments that the mere existence of some prudent options or a nominally sound process suffices to defeat a claim, underscoring that courts must consider the overall reas

A substantive trust law approach is the only framework that remains true to ERISA’s “sole interest” and “prudent man” mandates. It ensures that the law protects the results of retirement planning—the actual benefits—rather than just the records of the plan administrators. By rejecting a purely proceduralist interpretation, the EBSA would realign itself with the congressional intent to provide the “highest duty known to the law” to the American worker.^[1]

Going Forward: An Inequitable Shift in the Balance of Power and Yet Another Betrayal of American Workers
The EBSA’s movement toward proceduralism effectively transforms ERISA from a “shield” for the participant into a “sword” for the insurance industry. By focusing on the way a decision is made rather than the wisdom of the decision itself, the regulatory environment favors the institutionalinequity and stability of insurance companies and financial intermediaries. While the insurance industry gains “certainty” and “litigation protection,” the plan participant loses the substantive guarantees that their retirement assets are being managed with the highest degree of care and the best possible objective outcomes.

ERISA does not permit fiduciary prudence to be reduced to procedural compliance. Congress adopted the common law of trusts to ensure that fiduciary duties under ERISA would include substantive reasonableness and meaningful remedial protections, including trust-law rules governing causation and burden allocation.The EBSA’s procedural interpretation conflicts with those principles, displaces incorporated trust-law doctrines, and narrows fiduciary accountability in a manner inconsistent with the statute. For these reasons, the EBSA’s procedural interpretation is not entitled to judicial deference and should be rejected in favor of a continuing combination of procedural law and substantive trust law consistent with ERISA.

A subtantive trust law approach to fiduciary prudence under ERISA is more consistent with the stated purposes and goals of ERISA, and better protects the best interests of plan particiapnts and their beneficiaries compared to a proceduralistic approach. A substantive trust law approach to the Employee Retirement Income Security Act (ERISA) argues that the “prudence” of a fiduciary action is measured not merely by the steps taken to reach a decision, but by the objective reasonableness of the decision itself. This perspective aligns with the historical foundations of trust law and the explicit remedial goals of Congress when it enacted ERISA in 1974.

The EBSA’s recent interpretive shift represents a departure from the “remedial purposes” of ERISA. By elevating proceduralism to the exclusion of substantive trust law, the agency is ignoring the legislative history that sought to protect participants from the “sophisticated” maneuvers of the financial industry.^114] Fiduciary prudence is not an “either-or” proposition; it is a holistic requirement that demands both a sound process and a substantively prudent result. To protect the retirement security of millions of Americans, the EBSA must return to a standard that integrates the rigorous substantive protections of traditional trust law.

A substantive approach is more consistent with ERISA’s stated purposes and goals because:

(1) Objective Outcomes Matter: In traditional trust law, a trustee who follows a “perfect” process but invests in a patently speculative or overpriced asset is still liable for a breach of the duty of care.^[4]

(2) The “Sole Interest” Rule: ERISA requires fiduciaries to act for the “exclusive purpose” of providing benefits.^[7] A proceduralist approach allows fiduciaries to justify decisions that benefit third parties (like insurance companies) as long as they can document a “reason” for doing so. A substantive approach asks: “Does this transaction actually benefit the participant?”^[1]

By rejecting a purely proceduralist interpretation, the EBSA would realign itself with the congressional intent to provide the “highest duty known to the law” to the American worker.^[11]The legislative history of ERISA reveals that Congress intended to create a “uniform standard of duty” that was even more stringent than the common law in certain respects.[ A mentioned earlier herein, the Senate Report accompanying the Act emphasized that the legislation was necessary because existing “procedural” safeguards were insufficient to prevent the “mismanagement and waste” of plan assets.^[3]

By adopting a substantive trust law approach, the law fulfills its “remedial” purpose. As the Supreme Court noted in Tibble v. Edison International[x], a fiduciary has a “continuing duty to monitor” investments and remove imprudent ones.^[15] This duty is substantive; it is not enough to have a process for monitoring if that process fails to result in the removal of an objectively inferior investment. A procedural approach, by contrast, creates a “safe harbor” for mediocrity, where fiduciaries are protected as long as they have a paper trail, regardless of whether the plan participants are losing money to excessive fees or poor performance.^[1]

A substantive approach protects participants against industry conflicts by:

(1) Eliminating “Check-the-Box” Fiduciary Duty: It prevents insurance companies from selling “fiduciary toolkits” that provide the appearance of diligence while masking high-cost products.^[8]

(2) Focusing on Cost-Benefit Reality: Under a substantive trust law analysis, if a fiduciary selects an annuity with a 4% internal fee when an identical product exists for 1%, the fiduciary is liable regardless of how many meetings they held to discuss it.^[15]

(3) Aligning Incentives: When fiduciaries know they will be judged on the substance of their decisions, they are less likely to accept “bundled” services from insurers that include hidden revenue-sharing agreements.^[16]

Bottom Line – A substantive trust law approach is the only framework that remains true to ERISA’s “sole interest” and “prudent man” mandates. It ensures that the law protects the results of retirement planning—the actual benefits—rather than just the records and proceedings of the plan administrators and investment committee.

Notes
1. Tibble. Edison Int’l,575 U.S. 523 (2015) (Tibble); Donovan v. Bierwirth, 680 F.2d 263 (2d. Cir 1982); 573 U.S. 409 (2014)
2. Boggs v. Boggs, 520 U.S. 833 (1007).
3. Senate Reports 93-127 (1973); Senate Report 93-383 (1973); Senate Report 93-1090 (1974)
4. George Gleason Bogert, The Law of Trusts and Trustees.
5. 29 U.S.C. Section 1104(a)(1)(B.) (ERISA)
6. ERISA and Restatement (Third) Trusts, Section 78. (duty of loyalty)
7. ERISA Section 2.
8. George Gleason Bogert, The Law of Trusts and Trustees. (Bogert)
9. 29 U.S.C. Section 1104 (a)(1)(B).
10. ERISA and Restatement (Third) Trusts, Section 78. (duty of loyalty).
11. Restatement (Third) Trusts, Section 78. (loyal)
12. ERISA.
13. Bogert.
14. Tibble.
15. Donovan v. Bierwirth, 680 F.2d 263 (2d. Cir 1982).573 U.S. 409 (2014). (Bierwirth)
16.Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409 (2014).
17. Tibble v. Edison Int’l,575 U.S. 523 (2015). (Tibble)
18.Hughes v. Northwestern University, 595 U.S. 170 (2022) (Hughes)
19. Hughes.

Posted in fiduciary compliance, fiduciary duty, fiduciary prudence, fiduciary prudence, fiduciary law, fiduciary liability, ERISA, fiduciary litigation | Tagged 401k, ERISA, ERISA litigation, fiduciary, fiduciary investing, fiduciary law, fiduciary liability, Fiduciary litigation, plan sponsor, retirement plans | Leave a comment

Guest Article On Supreme Court’s Decision to Hear the Intel Case

Posted on January 22, 2026 by jwatkins

Several years ago, Chris Tobe, Risk Ferri, and I founded the “The CommonSense 401k Project” web site. The” Project” was created as a means of providing information on fiduciary law and compliance, specifically with regard to ERISA, the primary law with regard to American pension plans.

Chrisnow manages the “Project’s” web site/blog. Chris has extensive experience in the area of annuitiss and related investment options. He frequently serves as an expert in ERISA litigation cases.

I am a former ERISA attorney and former trial attorney. While Chris’ services primarily focus on fiduciary liability after the fact, after ERISA violations have occured, my practice is now focused on serving as a fiduciary risk management/minimization consultant, focusing on proactively designing, implementing, and maintaining ERISA defined contribution plans, such as 401k plans.

Chris recently wrote an oustanding post focusing on the Supreme Court’s recent announcemnt that it would hear a case involving the Intel corporation and the issuws involving the inclusion of alternative investments in defined contribution plans. Given the importance of pension plans in many worker’s financial security, the Intel case has the potential to impact many workers’ retirement security, including the availability of certain investments generally considered as inherently riskier than most investments commonly found in defined contribution plan, e.g., index mutual funds.

ERISA 404(a) requires that a plan sponsor has a duty to independently investigate and evaluate each investment offered wihtin a pension plan. However, as Chris points out in his post, the lack of transparency is a common issue with most alternative investments. Only having a product vendor’s unverifiable representations to rely on in making potentially life altering decisions for one’s employees, and the potenial liability for such decisions, often puts plan sponsors in an untenable financial position, one a prudent fiduciary would prefer to avoid, especially if the investment in question is not even legally required to be offered by a plan.

Chris has also included comments and insights regarding recent posts that I have written with regard to amicus briefs and other positions that the Department of Labor (DOL) and/or the Employess Benefits Security Administration (EBSA). These two entities are charged with protecting employees’ rights and protections guaranteed under ERISA. However, they have issuedbriefs and/or taken positions that arguably place the best interests of plan sponsors and product vendors ahead of the best interests of American workers.

While both the DOL and EBSA have attempted to justify their questionable actions by citing a new administration, that raises the question of whether ERISA’s guaranteed rights and protections are so vitally important to American workers’ financial security that they should be beyond the whims and manipulation of each new Presidential administration. After all, ERISA’s goals and guarantees do not change with each administration, so why should ERISA’s priorities and enforcment activity change?

The Supreme Court’s Intel Case is About Secrecy, Fake Benchmarks, and Fiduciary Illusions

Posted in fiduciary compliance | Tagged 401kplans, ERISA, fiduciary investing, fiduciary law, Fiduciary litigation, fiduciary risk management, fiduciaryprudence, pension plans, retirement plans, Supreme Court | Leave a comment

Fair Dinkum: A Critique of the EBSA’s Amicus Brief in Pizarro v. Home Depot

Posted on January 18, 2026 by jwatkins

James W. Watkins, III, J.D., CFP Emeritus^TM, AWMA®

THESIS

THE BURDEN OF PROOF ON CAUSATION PROPERLY RESTS WITH THE FIDUCIARY DUE TO ERISA’S REMEDIAL PURPOSE AND STRUCTURAL INFORMATION ASYMMETRY

I. ERISA’s Remedial Purpose Requires Burden Allocation That Enables, Not Defeats, Enforcement

ERISA “was enacted to protect … the interests of participants in employee benefit plans and their beneficiaries” by imposing fiduciary standards and “appropriate remedies for violations.” 29 U.S.C. § 1001(b). As the Supreme Court has explained, ERISA’s fiduciary duties “are derived from trust law,” and liability must be workable in practice, not illusory. Varity Corp. v. Howe, 516 U.S. 489, 497 (1996); Tibble v. Edison Int’l, 575 U.S. 523, 528 (2015). A rule that effectively requires plan participants to prove what alternative investment the fiduciary would have chosen would frustrate those remedial objectives.

II. Trust Law and ERISA Jurisprudence Allocate the Burden on Causation to the Fiduciary

Under trust law principles incorporated into ERISA §§ 404 and 409, once a plaintiff establishes that a fiduciary breached a duty and that the plan suffered a loss, the trustee bears the burden to prove that the loss would have occurred even if the breach had not happened. Restatement (Third) of Trusts § 100 cmt. f(1) (“Where a trustee has committed a breach, the loss is measured by…the extent to which the…trust assets have been diminished…in comparison with what they would have been had the breach not occurred. The burden is on the trustee to prove that the loss…would have occurred in the absence of the breach.”).

Multiple courts agree that this trust-law allocation is “faithful to ERISA’s text, structure, and purposes.” Brotherston v. Putnam Invs., LLC, 907 F.3d 17, 40 (1st Cir. 2018).

In Brotherston, the First Circuit recognized that fiduciaries have exclusive access to information about their own decision-making process, alternatives considered, and the specific conduct that gave rise to the loss. As Brotherston explained:

“Because fiduciaries’ decisionmaking processes are … often exclusively within the control of the defendants … it makes little sense to require plaintiffs to prove all aspects of their case before they have had any discovery.” Id. at 40.

The court observed that fiduciaries, not participants, control key documents and internal deliberations, and that shifting the burden on causation to fiduciaries “accords with ordinary trust principles and minimizes the unfairness to plaintiffs.” Id.

III. Sacerdote and the Solicitor General Confirm That ERISA Imposes Burden-Shifting Where Information Asymmetry Is Acute

In Sacerdote v. N.Y. Univ., 328 F. Supp. 3d 273 (S.D.N.Y. 2018), the district court adopted the same approach: once a plaintiff proves breach and prima facie loss, the fiduciary must demonstrate that the loss would have occurred irrespective of the breach. The court described this burden allocation as rooted in equity and necessary given the structural information imbalance in ERISA plans.

The United States, through the Solicitor General’s amicus brief supporting affirmance in Brotherston, likewise articulated the appropriate burden allocation:

“Once a plaintiff establishes that a fiduciary breached a duty and that the plan suffered a loss, it is consistent with ERISA’s text and purposes to place on the fiduciary the burden of showing that the loss would have occurred even if the fiduciary had fulfilled its obligations.” U.S. Br.otherston Amicus at 22, Brotherston v. Putnam Invs., LLC (1st Cir. No. 17-1561).

The Solicitor General further explained that requiring plan participants to prove a negative counterfactual — what would have happened absent the breach — without access to the fiduciary’s processes would effectively immunize imprudent conduct:

“Because fiduciaries are in possession of the information necessary to assess alternative actions and their effects, placing the burden of proof on them is consistent with ordinary principles of equity.” Id. at 23.

These statements underscore that ERISA’s remedial design contemplates burden shifting to redress information asymmetries, not to shield fiduciaries from accountability.

IV. Information Asymmetry Makes Traditional Participant Burden on Causation Unworkable

Fiduciary breach cases inherently involve information uniquely possessed by the fiduciary: investment committee minutes, rejected alternatives, risk analyses, benchmarking, internal correspondence, and contemporaneous deliberations. Requiring participants — pre-discovery — to allege and eventually prove a precise counterfactual causation “would force plaintiffs to plead facts that lie peculiarly within the knowledge of defendants,” contrary to Supreme Court precedent. Swierkiewicz v. Sorema N.A., 534 U.S. 506, 512 (2002). This is especially true where the fiduciary’s duty is procedural — a duty to follow a prudent process rather than a promise of performance.

As Brotherston explained, “[m]uch of the universe of relevant information about a fiduciary’s conduct (and the alternatives that were considered and rejected) resides with the fiduciary.” 907 F.3d at 40. Absent burden shifting, fiduciaries could maintain opacity, depriving participants of a meaningful remedy.

V. Proper Standard for Causation Burden Shifting

I found it interessing to compare the Solicitor General’s position in the amicus brief submitted in the Brotherston to the EBSA’s recent amicus brief:

When a plaintiff brings suit against a plan sponsorr for breach of trust,the plaintiff generally bea the the burden of proff. The general rule, however, is moderated in order to take account of the plan sponsor’s duties of disclosure….as well as the plan’s sponsor’s often unique access to information about the plan and its activities, and also to encourage the plan sponsor’s compliance with applicable fiduciary duties.
U.S. Brotherston amicus @37

The Supreme Court has made clear that whatever the overall balance the common law might have struck between the the protection and beneficiaries, ERISA’s adoption reflected Congress’ desire to offer employees enhanced protecion for their benefits…In other words, Congress sought to offer beneficiaries, not fiduciaries, more protection than they had under common law, albeit while still paying heed to the counterproductive effects of complexity and litigation risk. (emphasis added)
U.S. Brotherston amicus @37

The proper standard consistent with ERISA’s remedial purpose, trust-law roots, and equitable principles is:

Once a plaintiff plausibly alleges and later proves a breach of fiduciary duty and a prima facie loss to the plan, the burden shifts to the fiduciary to demonstrate that the loss was not caused by the breach.

This allocation neither presumes liability nor imposes strict liability; it merely requires fiduciaries to justify their conduct and its consequences—precisely what ERISA demands.

This allocation permits meaningful adjudication of fiduciary duty claims without unfairly insulating fiduciaries from liability simply because they control the evidentiary record.

GOING FORWARD

Because ERISA is a remedial statute grounded in trust law, and because fiduciaries exclusively control the information necessary to assess causation, the burden of proof on causation properly rests with the fiduciary once a breach and loss are shown. Any contrary rule would undermine ERISA’s core purpose, reward informational asymmetry, and render fiduciary duties unenforceable in practice.

So, the obvious question is – why would the EBSA submit an amicus brief that is totally inconsistent with legal precedent and tries to burden plan participants with an impossible task, a task which reuires them to plead the mental processes of a plan’s investment commitee without the benefit of discovery, a task which is contrary to Rules 8 and 9 of the Federal Rules of Civil Procedure.

I have two theories:
1. The financial services industry and plan sponsora know, or should knon from their fiduciary duty to investigate and evaluate, each investment offered within a [plan, that they cannot carry the burden of proof on causation These product vendors are well aware that their products are designed to ensure that their products are in thei rown best interests, not the best interests of plan participants, a clear violation of the fiduciary duty of loyalty.

2. Experience has shown that many plan sponsors do not properly conduct their legally required investigation and evaluation. In most cases they fail to do so, choosing to blindly trust the product vendors, because the plan spsonors do not personally know how to conduct the necessary investigation and evaluation, even though AI can now quickly perform cost-benefits analyses and/or annuity breakeven analyses which typically expose the legal imprudence of a plan’s investment optio. AI now makes properly preparing a breakeven analysis on an annuity, including factoring in present value and mortality risk, very simple. As ERISA sets out, if a plan sponsor cannot perform such duties, , the plan sponsor, it has a duty to hire someone who can.

I believe that the volume of ERISA breach related litigation is going to rise significantly as plan sponsors needlessly expose themselves to fiduciary liability as a result of offering more inherently risky investments in their plans. Prudent plan sponsors would be well served to follow Jack Welch’s admonition – “Don’t make the process harder than it is.”

In closing, Judge Kayatta’s Brotherston opinion provided excellent risk management advice for plan sponsors:

The federal government’s highly successful retirement plan, the Thrift Savings Plan (TSP), adopts Judge Kayatta’s advice. The fact that more plan sponsors do not model the proven TSP never ceases to amaze me, and proves my point that most plan sponsors simply do not understand what they are, and, more importantly, are not, required to do under ERISA.

In closing, Judge Kayatta’s Brotherston opinion provided excellent risk management advice for plan sponsors:

nothing in our opinion places on ERISA fiduciaries any burdens or risks not faced routinely by financial fiduciaries. While Putnam warns of putative ERISA plans forgone for fear of litigation risk, it points to no evidence that employers in, for example, the Fourth, Fifth, and Eighth Circuits, are less likely to adopt ERISA plans. Moreover, any fiduciary of a plan such as the Plan in this case can easily insulate itself by selecting well-established, low-fee and diversified market index funds. And any fiduciary that decides it can find funds that beat the market will be immune to liability unless a district court finds it imprudent in its method of selecting such funds, and finds that a loss occurred as a result. In short, these are not matters concerning which ERISA fiduciaries need cry “wolf.”
Brotherston v. Putnam Investments 907 F.4d. 17, 39 (1st Cir. 2018)

The federal government’s highly successful retirement plan, the Thrift Savings Plan (TSP), adopts Judge Kayatta’s advice. The fact that more plan sponsors do not simply model the proven TSP never ceases to amaze me, and proves my point that most plan sposnors simply do not understand what they are, and, more importantly, are not, required to do under ERISA.

At some point, SCOTUS will have another oppounity to resolve the burden of proof on causation issue.Hopefully, that opportunity will come sooner than later. The current split in the federal courts on the burden of prood as to causation has resulted in the inequitable situation where em[ployees’ rights and protections guaranteed under ERISA are determined solely by their place of residence. The interpretations of ERISA in the courts need to be uniform and not dependnety on which party is in office. If the DOL’s and EBSA’s argumnets in future ERISA litigations are based on it’s recently submitted, flawed amicus brief, expect a quick decision in favor of the plan participants. The EBSA’s amicus brief is relatively weak given current legal precedent which suppots the applicationof trust trust law The amicus brief is a poorly veiled and desperate attempt to avoid the application of trust law, specifically Section 100, comment f, of the Restatement (Third) of Trusts. Section 100, comment (f) , expressly places the burden of proof on causation on the plan sponsor once the plan participants establish a breach and resulting financial loss/

Posted in fiduciary compliance, fiduciary prudence, fiduciary duty | Tagged 401k, 401k plans, ERISA, ERISA litigation, fiduciary, fiduciary law, Fiduciary litigation, Fiduciary prudence, fiduciary risk management, plan sponsor, retirement plans | 1 Comment

Upon Further Review; The 3 X 3 Analysis That Shows Why Prudent Plan Sponsors Will Never Offer Annuities Within Their Plan

Posted on January 4, 2026 by jwatkins

James W. Watkins, III, J.D., CFP Emeritus^TM, AWMA®

As I learn more about AI, I m amazed how useful if can be in preparing forensic analyses and trial presentation material. As a fiduciary risk management consultant, I continue to be amazed at how little pension plans and investment foiduciaries actually know about fiduciary law, especially the three Primary doctrinal sources of fiduciary law and the three core principles represented by each of the doctrinal sources.

The three primary doctrinal sources of fiduciary duty—trust law, equity law, and agency law—are fully consistent with, and in fact require application of, the three economic principles of: (1) commensurate return, (2) breakeven analysis, and (3) breakeven en point relative to participant life expectancy, particularly in the 401(k) context.

With a few contributions of my own, the following post was created by an AI prompt for a professional presentation entitled “Six ‘Secrets’ About In-Plan Annuities, ‘Income Solutions’ and Fiduciary LiabilityThat Your Plan Advisers Probably ‘Forget’ to Explain to You …And You Probably Didn’t Know to AskAbout!”

Executive Thesis

Across trust law, equity, and agency, fiduciary obligation is not satisfied by nominal parity (e.g., “same stated rate” or “guaranteed income”), but by economic equivalence measured ex ante.
Accordingly:

Commensurate return is the substantive expression of loyalty and prudence.
Breakeven analysis is the analytical method by which commensurate return is tested.
Breakeven en point relative to life expectancy is the temporal constraint imposed by fiduciary law when mortality risk and forfeiture are present.

A fiduciary who ignores these principles acts inconsistently with all three foundational bodies of fiduciary law, even if formal disclosures are made or statutory safe harbors are invoked.

I. Trust Law: Preservation of Corpus and Economically Equivalent Exchange

A. Core Trust-Law Duties

Trust law imposes duties of:

Loyalty
Prudence
Impartiality
Preservation of trust corpus

These duties require the trustee to ensure that any exchange of trust property is economically equivalent or superior, evaluated at the time of decision.

B. Commensurate Return as Trust-Law Requirement

Under trust doctrine:

A trustee may not trade liquidity, optionality, or principal protection for benefits that are not actuarially or economically equivalent.
Expected return must be commensurate with risks imposed, including:
- Mortality risk
- Irrevocability
- Loss of control
- Embedded fees

A fixed or in-plan annuity that offers the same stated rate as a CD or stable value fund but embeds forfeiture risk fails the commensurate return requirement unless higher expected value compensates for that risk.

C. Breakeven Analysis as Trust Accounting

Breakeven analysis operationalizes trust-law prudence by asking:

At what point does the beneficiary recover the value of the property transferred into trust?

If:

Breakeven occurs after normal life expectancy, or
Recovery is contingent on survival beyond actuarial norms,

then the trustee has impaired corpus on an expected-value basis, violating trust law even if nominal income is paid.

II. Equity Law: Substance Over Form and Prevention of Unjust Enrichment

A. Equity’s Governing Principle

Equity disregards labels and focuses on economic substance.
Courts of equity intervene where:

One party is unjustly enriched, or
A fiduciary extracts value through asymmetry of information or power.

B. Commensurate Return as Anti–Unjust Enrichment Doctrine

Equity requires that:

A fiduciary not profit at the beneficiary’s expense, directly or indirectly.
Embedded margins, mortality credits retained by insurers, or forfeited principal constitute equitable enrichment unless offset by higher expected benefit.

Thus, equity aligns directly with commensurate return:
If the participant bears mortality risk without actuarial compensation, the fiduciary arrangement is inequitable.

C. Breakeven En Point as Equitable Boundary

Equity is especially sensitive to timing asymmetry:

If the fiduciary or third party benefits immediately, while
The beneficiary only benefits after surviving to an advanced age,

equity recognizes this as structural unfairness, even absent fraud.

A breakeven point beyond life expectancy:

Converts retirement income into a speculative wager, and
Violates equity’s prohibition against fiduciary-induced forfeiture.

III. Agency Law: Reasoned Decision-Making and Principal-Centered Outcomes

A. Agency Law Duties

As agents, fiduciaries must:

Act solely in the principal’s interest
Use reasonable care and competence
Avoid conflicted recommendations
Make decisions a reasonable fiduciary would make under similar circumstances

B. Commensurate Return as Rational Agency Standard

A reasonable agent:

Does not recommend a product with inferior expected value when a functionally equivalent, lower-cost alternative exists.
Must justify any trade-off with measurable compensating benefit.

Agency law therefore demands commensurate return as a condition of rational action.

C. Breakeven Analysis as Minimum Competence

Failure to perform breakeven analysis:

Ignores foreseeable outcomes
Constitutes decision-making without economic foundation
Violates the agent’s duty of care

When mortality risk is present, a reasonable agent must ask:

Will most principals live long enough to recover their capital?

If the answer is no, recommending the product is per se imprudent.

IV. Integration: Life Expectancy as the Fiduciary Time Horizon

A. Why Life Expectancy Is the Correct Benchmark

Across all three doctrines:

Fiduciary obligations are evaluated ex ante, using known probabilities and the “knew or should have known standard un ERISA 404(a)/
Normal life expectancy represents the median outcome for similarly situated participants.

Thus, fiduciary prudence requires that:

Breakeven occur at or before life expectancy, not beyond it.

B. Rejection of “Long-Tail” Justifications

Arguments that:

“Some participants live longer,” or
“Income is guaranteed for life”

fail fiduciary scrutiny because:

Fiduciary law protects the typical participant, not actuarial outliers.
Guarantees do not cure expected-value loss.

V. Synthesis Table: Doctrinal Alignment

Fiduciary Doctrine	Commensurate Return	Breakeven Analysis	Breakeven ≤ Life Expectancy
Trust Law	Required to preserve corpus	Required to test equivalence	Required to avoid expected impairment
Equity Law	Prevents unjust enrichment	Reveals substance over form	Prevents structural unfairness
Agency Law	Required for rational advice	Required for reasonable care	Required for principal-centered outcomes

VI. Going Forward

The principles of commensurate return, breakeven analysis, and breakeven en point relative to life expectancy are not novel economic constructs. They are the analytical expressions of long-standing fiduciary doctrines rooted in trust law, equity, and agency.

A 401(k) fiduciary who:

Transfers participant capital into a product with embedded forfeiture risk,
Fails to demonstrate actuarial equivalence,
And permits breakeven to occur beyond normal life expectancy,

violates fiduciary law in substance, regardless of disclosures, guarantees, or formal compliance.

This post also shows why the financial services and annuity industries have, and will continue to vehemently oppose any attempt to hold annuities to a true fiduciary standard- they knonw that annuities, as presently structured, can never meet a true fiduciary standard that complies with all of the issues addressed herein. My assertion can be easily proven with a properly constructed breakeven analyis, one that factors in both present value and mortality risk. We’ll save that for my next post!

Posted in fiduciary compliance | 2 Comments

The DOL’s Pizarro v. Home Depot Amicus Brief: Borzi and Gomez Don’t Live Here @ EBSA Anymore

Posted on December 14, 2025 by jwatkins

James W. Watkins, III, J.D., CFP Emeritus^TM, AWMA®

May It Please the Court:

The Department of Labor’s December, 2025, amicus brief urges this Court to hold that ERISA plan participants bear the burden of proving causation as part of their fiduciary-breach claims. That position is not merely inconsistent with ERISA’s text and trust-law principles—it is fundamentally incompatible with the Federal Rules of Civil Procedure, particularly Rule 9(b).

In its Pizarro amicus brief, the Department asserts that causation is an element plaintiffs must affirmatively establish and that courts err by shifting any burden to fiduciaries once a breach and loss are plausibly alleged. But that framing ignores the procedural consequences of what the Department is demanding. In ERISA fiduciary-breach cases, causation is inseparable from the fiduciary’s internal decision-making: what alternatives were considered, what information was reviewed, what risks were known, and why particular investments or fees were selected. Those facts go directly to the fiduciary’s knowledge, intent, and judgment—classic “conditions of a person’s mind.”

Rule 9(b) expressly provides that such mental states “may be alleged generally.” Fed. R. Civ. P. 9(b). The DOL’s position would nullify that rule in the ERISA context by requiring plaintiffs, at the outset, to plead facts establishing a causal link that necessarily depends on undisclosed fiduciary deliberations. This Court has made clear that while Rule 8 requires plausibility, it does not require plaintiffs to plead facts that are uniquely within a defendant’s control, nor to prove their case before discovery. Ashcroft v. Iqbal, 556 U.S. 662, 686–87 (2009); Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007).

The Department’s Pizarro argument thus collapses the distinction between pleading and proof. To satisfy the causation burden the DOL proposes, plan participants would be forced to allege not only that a prudent fiduciary would have acted differently, but why this fiduciary did not—what it knew, what it ignored, and how it internally evaluated alternatives. That is precisely the type of heightened mental-state pleading that Rule 9 forbids and that this Court has repeatedly rejected. Swierkiewicz v. Sorema N.A., 534 U.S. 506, 512 (2002).

Nor can the Department’s position be reconciled with ERISA’s remedial purpose or this Court’s trust-law jurisprudence. ERISA fiduciary duties are derived from the common law of trusts, which has long recognized that once a beneficiary shows a breach of duty and a resulting loss, the burden shifts to the fiduciary to disprove causation. Tibble v. Edison Int’l, 575 U.S. 523, 528 (2015); Varity Corp. v. Howe, 516 U.S. 489, 497 (1996). Several courts of appeals have faithfully applied that principle, holding that fiduciaries—who control the relevant information—are best positioned to explain whether losses would have occurred absent the breach. Brotherston v. Putnam Invs., LLC, 907 F.3d 17, 39–41 (1st Cir. 2018).

The DOL’s Pizarro brief asks this Court to reject that settled framework and impose a pleading regime under which ERISA plaintiffs must establish causation without access to the fiduciary’s files, deliberations, or explanations. That approach would not merely reallocate a burden of proof at trial; it would function as a gatekeeping rule that prevents claims from ever reaching discovery. Nothing in ERISA’s text, this Court’s precedent, or the Federal Rules supports such a result.

In short, the Department’s December, 2025, amicus position cannot be squared with Rule 9(b), Rule 8, or ERISA’s protective purpose. Accepting it would require this Court to hold—implicitly but unmistakably—that ERISA plaintiffs must plead fiduciaries’ states of mind with specificity, even though the Federal Rules expressly say they need not. This Court should decline that invitation and reaffirm that ERISA’s enforcement scheme remains governed by ordinary pleading rules and longstanding trust-law principles—not by the heightened and unworkable standard the Department proposes in Pizarro.

In its Pizarro brief, the Department asserts that causation is an element plaintiffs must affirmatively establish and that courts err by shifting any burden to fiduciaries once a breach and loss are plausibly alleged. But that framing ignores the procedural consequences of what the Department is demanding. In ERISA fiduciary-breach cases, causation is inseparable from the fiduciary’s internal decision-making: what alternatives were considered, what information was reviewed, what risks were known, and why particular investments or fees were selected. Those facts go directly to the fiduciary’s knowledge, intent, and judgment—classic “conditions of a person’s mind.”

Rule 9(b) expressly provides that such mental states “may be alleged generally.” Fed. R. Civ. P. 9(b). The DOL’s position would nullify that rule in the ERISA context by requiring plaintiffs, at the outset, to plead facts establishing a causal link that necessarily depends on undisclosed fiduciary deliberations. This Court has made clear that while Rule 8 requires plausibility, it does not require plaintiffs to plead facts that are uniquely within a defendant’s control, nor to prove their case before discovery. Ashcroft v. Iqbal, 556 U.S. 662, 686–87 (2009); Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007).

In it’s new December, 2025, amicus brief, the DOL’s Solicitor General’s now argues a totally new position, a position diametrically opposed from the position the DOL argued earlier in its amicus brief whwn Pizarro was before the 11th Circuit Court of Appeals. The DOL now argues that the applicable standard is one involving procdural issues is rather than trust law issues. Even assuming the DOL’a new “procedural theory: has merit (it doesn’t), the DOL’s”precedural” argument is fatally flawed when the Federal Rules of Procedure are considered.

In short, the DOL’s December, 2025, amicus position cannot be squared with Rule 9(b), Rule 8, or ERISA’s protective purpose. Rule 9(b) expressly provides that mental states ” may be allegedly genrally.” The DOL’s position wouldd nullify that rule in the ERISA contaxt by requireing plaintiffs at the outset, to plead facts establishing a causal link that necessarily depends on undisclosed fiduciary deliberations.

This Court has made clear that while Fed.R.Civ.P. Rule 8 requires plaintiffs to plauisibily plead its case, it does not require plaintiffs to plead facts that are uiquely within a defendant’s control, nor to prove their case before discovery, Ashcroft v. Iqbal, 556 U.S. 662, 686-87(2009), Bell Atlantic Corp v. Twombly, 550 U.S. 544, 535 (2007). The DOL also objects to a plaintiff’s need for dicovery, which the DOL also argues is costly and unecessarey. The DOL’s objection to discovery is disenguous, as SCOTUS addressed and refuted this issue in Cunningham v. Cornell University. 604 U.S. ____ (2025). As Justice Jackson noted in Cunningham and other federal judges, most notably Judge Sutton of the 6th Circuit of Appeals, have noted, courts have various tools available to protect against abusive discovery, e.g., targeted discovery, controlled discovery.

Accepting the Solicior General’s December, 2025, amicus brief would require this Court to hold—implicitly but unmistakably—that ERISA plaintiffs must plead fiduciaries’ states of mind with specificity, even though the Federal Rules expressly say they need not. This Court should decline that invitation and reaffirm that ERISA’s enforcement scheme remains governed by ordinary pleading rules and longstanding trust-law principles—not by the heightened and unworkable standard the Department proposes in Pizarro.

Posted in 401k litigation, fiduciary compliance, fiduciary litigation, ERISA, ERISA litigation, DOL | 1 Comment

The Prudent Investment Fiduciary Rules

Is the DOL/EBSA Trying to Serve Two Masters? ERISA Section 404(a)’s Independent Investigation and Evaluation Requirements and the DOL/EBSA Proposed Rule on Alternative Investments

Much Ado About Nothing?: The DOL’s New Alternative Investment Rule vs. the Administrative Procedure Act

About jwatkins

Reasserting ERISA’s Private Enforcement Design: A Rebuttal to EBSA’s “Frivolous Litigation” Narrative

2.. Legislative History Confirms Congress Intended Expansive Participant Litigation

The Active Management Value Ratio as a Cost-Benefit Framework: Integrating AI into Fiduciary Prudence Analysis

Guest Article On Supreme Court’s Decision to Hear the Intel Case

Upon Further Review; The 3 X 3 Analysis That Shows Why Prudent Plan Sponsors Will Never Offer Annuities Within Their Plan

Executive Thesis

I. Trust Law: Preservation of Corpus and Economically Equivalent Exchange

A. Core Trust-Law Duties

B. Commensurate Return as Trust-Law Requirement

C. Breakeven Analysis as Trust Accounting

II. Equity Law: Substance Over Form and Prevention of Unjust Enrichment

A. Equity’s Governing Principle

B. Commensurate Return as Anti–Unjust Enrichment Doctrine

C. Breakeven En Point as Equitable Boundary

III. Agency Law: Reasoned Decision-Making and Principal-Centered Outcomes

A. Agency Law Duties

B. Commensurate Return as Rational Agency Standard

C. Breakeven Analysis as Minimum Competence

IV. Integration: Life Expectancy as the Fiduciary Time Horizon

A. Why Life Expectancy Is the Correct Benchmark

B. Rejection of “Long-Tail” Justifications

V. Synthesis Table: Doctrinal Alignment

VI. Going Forward

The DOL’s Pizarro v. Home Depot Amicus Brief: Borzi and Gomez Don’t Live Here @ EBSA Anymore

Email Subscription

Meta

Recent Posts

The Prudent Investment Adviser Rules

Follow Blog via Email