The Prudent Investment Fiduciary Rules

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.

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.

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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 duty, fiduciary prudence | 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

DOL’s Betrayal of American Workers Sends a Clear Message to American Workers: We Really Don’t Give a Damn About You!

Posted on November 30, 2025 by jwatkins

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

This past week has been a pivotal week in terms of American workers and their Rights and Protections under ERISA. The DOL finally announced what many had suspected – they would not pursue their defense of their Retirement Security Rule (Rule}. When one considers the strong litigation advantage the DOL seemingly held as a result of two prominent federal judges having issued two strong opinions supporting both the Rule itself and, more importantly, the process the DOL used in drafting the Rule, I have stated my belief that the DOL’s actions constitute a betrayal of American workers.

Admittedly a very strong strong opinion, but consider the following facts:
(1) Judge Barbara Lynn, Head Judge of the Northern District of Texas, wrote an excellent and detailed legal analysis of both the need for the Rule, especially the need to prevent the ongoing manipulative and misleading marketing of fixed indexed annuities (FIAs) to retirees.

Anyone ever considering an annuity should always insist on receiving a properly prepared breakeven analysis, one that factors in both present value and mortality risk.Annuity agents typically refuse to provide such analyses. Fortunately, AI now provides a free means of investors gathering such information through a properly prepared AI prompt.

Don’t believe me. Try the following prompt:

“Prepare a breakeven analysis, factoring in both present value and mortality risk, on a $50,000 immediate annuity for a 65 year old (need to specify male/female), paying $1500 a year (or based on whatever interest rate you want), based upon a normal life expectancy.”

What a properly prepared breakeven analysis typically exposes is that the odds are heavily against the annuity owner breaking even, i.e., receiving a commensurate return, a return of their original investment. Put another way, a breakeven analysis typically shows that an annuity is a bet, a bad bet, one which results in the annuity issuer typically receiving a significant windfall at the annuity owner’s expense. Equity law is a cornerstone of fiduciary law, requiring full disclosure and fair treatment of an investor. Annuities typically do neither.

Equally troublesome was the DOL’s announcement that it intends to propose a new fiduciary Rule in early 2026. A basic rule of litigation is maximize the strength of your case whenever possible. The DOL had two exceptional opinions from well-respected federal judges supporting the DOL’s arguments and the DOL just wasted the opinions. I have argued that the two judges’ opinions were like holding five aces in a poker game, and the DOL just folded. In my mind, wasting the two strong opinions and the seeming advantage they could have provided going forward constitutes a betrayal of American workers unless and until the DOL explains its action. At a minimum, the judges’ opinions would have put the annuity industry on the defensive.

(2) The annuity industry would probably argue that annuity investors can purchase a rider that does guarantee a return of their principal…for yet another fee, typically in the range of 1 percent. Keep in mind that both the DOL and GAO have published their findings on the cumulative impact of costs/fees on an investor. Their findings – over 20 years, each additional 1 percent in costs/fees reduces an invetror’s end-return by approximately 17 percent. With an annuity’s regular annual cost/fees typically in the 2 percent range, a rider fee of 1 percent would result in a projected loss in end-return of 51%, resulting in yet another advantage in favor of the annuity issuer at the annuity owner’s expense.

As if the DOL’s betrayal was not enough, Republican Congressman Randy Fine has introduced the “ERISA Litigation Reform Act,” calling for “strengthening” of pleading standards in ERISA actions. On first glance, my immediate reaction was that Congressman Fine must not be aware that Rule 9 of the Federal Rules of Civil Procedure clearly states that plaintiffs are not required to plead a defendant’s state of mind with specificity since no one can know someone’s thought processes. With regard to a defendant’s thought processes, general allegations are sufficient.

But Congressman Fine does not stop there. His bill also seeks to restrict the plan participants’ access to discovery, while at the same time requiring greater specificity on alleged fiduciary breaches.

I would argue that Congress Fine’s staff did not do their due diligence before arguing for greater specificity without allowing any discovery. I would suggest that Congressman Fine’s staff is guilty of the same frivolous activity that the Congressman falsely accuse plaintiffs of doing. Numerous courts have handed down decisions supporting the necessity of some discovery in connection with ERISA actions, as well as the availability of methods by which courts can prevent onerous and unnecessary costs. For example:

(1) “Discovery holds the promise of sharpening this process-based inquiry – one that plaintiffs could not reasonably be expected to detail without access to the fiduciaries’ internal considerations.”
Forman v. TriHealth, Inc., 40 F.4^th 443 (6th Cir. 2022)
“It is implausible to expect that a plaintiff will have personal knowledge of the details regarding the internal processes by which fiduciaries make decisions…ERISA plaintiffs generally lack the inside information necessary to make out their claims.in detail, and thus cannot be held to a heightened standard of pleading.”
Braden v. Wal-Mart Stores, Inc., 588 F.3d 585 (8th Cir. 2009)
Plaintiffs cannot reasonably be expected to know the details of the fiduciaries’ internal investment
deliberations before discovery, which “resides uniquely with defendants.”
Leber v. Citigroup 401(k) Plan Inv. Comm., 2014 WL 4851816 (S.D.N.Y. Sept. 30, 2014) (Judge Sidney H. Stein)
“[i]nternal fiduciary process is normally in the sole possession of the defendant. ERISA plainfiffs face “inherent information asymmetry ”
Sweda v. Univ. of Pennsylvania, 923 F.3d 320, 332-333 (3d Cir. 2019)
“Plaintiffs” cannot plead “the inner workings of fiduciary decision-making “ without discovery.
Hughes v. Northwesytern Univ., 83 F.4th 615, 629 (7th Cir. 2023).

Finally, to understand the strength of my arguments, one would need to read both Judge Lynn’s and Judge Stewart’s opinions. both of which are well reasoned and detailed. Judge Lynn’s opinion is Chamber of Commerce of the United States v. Hugler, 231 F. Supp. 3d 152, 190 (N.D. Tex. 2017). Judge Stewarts dissenting opinion on the 5th Circuit’s decision to stay the Rule is American Council of Life Insurers et al v. Hugler, Fifth Circuit Court of Appeals Case No. 17-10238 (3/15/2018).The decision can be downloaded at the Fifth Circuit’s web site.

And finally, before I posted this post, I started a poll on LinkedIn. The question was simple;
“Why do you think the DOL suddenly decided not to pursue an appeal in the Retirement Security Rule case? The options were A. They were afraid they would prevai or B. they were afraid they would lose. Thus far, 74 percent of the respondents have voted for option A. Interesting.

Posted in fiduciary compliance | Leave a comment

Implications of Section 78(3) of the Restatement (Third) of Trusts and the Expanding “Knew or Should Have Known” Liability Standard in the Era of AI

Posted on October 26, 2025 by jwatkins

The fiduciary duty of loyalty, as delineated in Section 78(3) of the Restatement (Third) of Trusts, imposes a stringent standard on fiduciaries, including plan sponsors and investment fiduciaries. The language “knew or should have known” underscores the expectation that fiduciaries remain vigilant and informed about their decisions and the tools they employ, such as artificial intelligence (AI).

In the retirement plan context (e.g., ERISA fiduciaries, plan sponsors, investment committees), courts and regulators often look to the Restatement for interpretive guidance on duty of prudence, loyalty, and monitoring obligations.

Under section 79(3), fiduciaries face exposure if they:

Knew of a breach (actual knowledge), or
Should have known (constructive knowledge based on what a reasonably prudent fiduciary would have known under the circumstances).

The “should have known” standard is objective and evolves with available tools, practices, and information in the fiduciary community.

A prudent fiduciary response requires

1. Demonstrated awareness of AI-enabled capabilities,
2. Deliberate governance decisions about their use, and
3. Robust documentation of the rationale behind those decisio

📌 Key Fiduciary Duties Under Section 78(3)

Section 78(3) articulates that a fiduciary must act with the utmost loyalty, avoiding conflicts of interest and placing the beneficiaries’ interests above all else. The “knew or should have known” standard implies that fiduciaries are expected to be aware of potential risks and to act proactively to mitigate them.

The “knew or should have known” standard is also repeated in ERISA scetion 404(a). Plan sponsors cannot legitimately claim to be surprised by the standard In the retirement plan context (e.g., ERISA fiduciaries, plan sponsors, investment committees), courts and regulators often look to the Restatement for interpretive guidance on duty of prudence, loyalty, and monitoring obligations. This is in accordance with the the Supreme Court’s direction in the landmark Tibble¹ decision – look to the Restatement of Trusts when fiduciary issues ar involved

The “knew or should have known” standard emphasizes the need for fiduciaries to be proactive and informed. While AI offers significant advantages in financial decision-making, fiduciaries must exercise caution, ensuring that their use of AI aligns with their duty of loyalty and care. By implementing due diligence, oversight, and expert consultation, fiduciaries can navigate the complexities of AI integration while upholding their fiduciary responsibilities.

The proliferation of AI-based research, analytics, and monitoring tools (e.g., for investment due diligence, ESG risk screening, fee benchmarking, and market anomaly detection) may raise the baseline of reasonable prudence.

A fiduciary who fails to use—or at least consider—the insights available from these technologies could be deemed to have constructive knowledge of risks or issues that AI tools would have revealed.

AI and the Evolving Standard of Care

Process Integration

Integrate AI outputs into existing oversight frameworks (e.g., quarterly committee meetings, monitoring reports)

Establishes a defensible process

Consultant Oversight	Require service providers to disclose their use of AI or data analytics in fiduciary support	Shifts part of monitoring duty and ensures informed oversight
Documentation and Governance	Keep records of deliberations on whether and how AI tools were evaluated, selected, or excluded	Creates a paper trail showing prudence and good faith

Key Implication:

As AI becomes a widely available tool, courts and regulators may infer that a prudent fiduciary should have known what a commercially reasonable AI system could have shown.

Under Section 78(3), fiduciaries can be liable not only for what they knew but also for what they should have known—as the standard of what they “should have known” evolves with technology.

The increasing accessibility and sophistication of AI-driven fiduciary tools raise the bar for prudence and oversight. Plan sponsors and fiduciaries who fail to integrate or reasonably evaluate such tools risk constructive knowledge liability and co-fiduciary exposure.

Courts and regulators are applying increasingly technologically informed standards of prudence. As fiduciary tools advance, the threshold for what a fiduciary “should have known” correspondingly increases. AI-enabled analytics are no longer experimental—they are rapidly becoming an industry norm.

Under Section 78(3), the constructive knowledge standard may expand as AI tools make previously opaque information discoverable. Fiduciaries can no longer credibly claim ignorance of risks that automated tools routinely identify in peer institutions.

Regulators (e.g., DOL, SEC) and plaintiffs’ counsel increasingly reference data analytics capabilities as part of fiduciary process evaluation. Fiduciaries who cannot demonstrate awareness of these tools face heightened litigation vulnerability and discovery risk.

The fiduciary duty of prudence is dynamic. As AI and data-driven research redefine what fiduciaries can reasonably know, Section 78(3) increases the risk that inaction or failure to adopt available tools will be seen as a breach of fiduciary duty.

The “should have known” standard is objective and evolves with available tools, practices, and information in the fiduciary community.

Going Forward
The likelihood that the courts may adopt a AI-generated breakeven analysis of annuities going forward is as much a matter of simplicity as a seach for equiatable decisions. The introduction of AI into questions of fiduciary prudence and fiducairy litigation zllows for quick and simple analyses, where changes in input data can be easily made, allowing for easier targeting of causation factors.My own experience in using AI to prepare annuity breakeven analysis have produced excellent results, allowing for properly factoring in both present value and mortality risk in the fiduciary prudence analysis. The ease and cost-efficiency of AI-generated fiduciary prudence analytics makes the inclusion of same in a plan’s process a must. An example of a sample prompt that I have used with success is

Prepare a breakeven analysis, brokern into annual intervals, factoring in both present value and mortality risk, on a $$$$$$ immediatew annuity for a 65 year-old male/female retiring at age X, asuming a normal life expectancy.

ERISA plaintifff attorneys are already using AI to develop cases and to design trial strategies. Plan sponsors can also use AI to create screens and interview strategies for vendos and plan advisers.

Notes
1. Tibble v. Edison International, 135 S. Ct. 1823, 1828 (2015).

Posted in 401k, fiduciary compliance, fiduciary prudence | Tagged 401k, 404(a), AI, artificial intelligence, compliance, ERISA, fiduciary law, fiduciaryliability, fiduciarylitigation, fiduciaryprudence, fiduciaryriskmanagement | 1 Comment

Closing Argument: Humble Arithmetic, Common Sense, and Fiduciary Liability vs. In-Plan Annuities

Posted on October 13, 2025 by jwatkins

“Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passion, they cannot alter the state of facts and evidence.” – John Adams

[C]onsistent with fiduciaries’ obligations to choose economically superior investments….[P]lan fiduciaries should consider factors that potentially influence risk and return. – 29 CFR 2509.2015-01

He fell at last a victim of the relentless ruthless of humble arithmetic. Remember, O stranger: ‘Arithmetic is the first of the sciences and the mother of safety’- Justice Louis Brandeis

Mathematics is the light that reveals the nature of things.”- Justice Louis Brandeis

“May it please the court. At issue in this case is whether the plan sponsor breached its fiduciary duties of prudence and loyalty by including annuities within the company’s 401(k) plan.

The plan argues that its decision to include such annuities was done solely in the best interest of both the plan participants and their beneficiaries, as required under Section 404(a) of ERISA. The plan sponsor claims that the selection and inclusion of the in-plan annuity was done solely to provide plan participants with additional retirement income and added financial security for participants and their beneficiaries. However, the evidence clearly suggests otherwise

During the trial, we introduced testimony and numerous exhibits that clearly establish that annuities are typically structured to benefit the annuity issuer, not the annuity owner. This is exactly why annuity issuers pay such a high commission to those who can convince a plan to offer annuities within their plan. It is also why annuities are an inherent fiduciary traps for plan sponsors and other investment fiduciaries.

The facts and mathematics that introduced in this case clearly establish that the annuity offered within the plan not only was not only not in the best interest of the plans’ participants or their beneficiaries, but that had the plan sponsor performed the legally required independent and objective investigation and evaluation required by ERISA¹, the resulting harm was easily foreseeable using basic mathematical skills, i.e., humble arithmetic.

If we assume that the annuity owner chose a “life only” option in order to receive a higher annual distribution payment, that would result in a potential windfall of $31,923.20 for the annuity issuer. Multiply that by the potential number of owners of that particular annuity in the plan and you understand why the annuity industry is trying to make inroads into 401(k) plans and other ERISA pension plans.

The second part of the fiduciary breach equation in this case involves determining whether and when the annuity owner would actually break even by recovering the full amount of her $50,000 original investment. In this case, lets examine the situation if the 65 year old female participant lives to age 100. According to the Social Security Administration (SSA) Period Life Table:

A 65-year-old woman has about a 3.6% to 4% chance of living to age 100.

Assuming our annuity owner lives to age 100, our present value calculations project that at 100 she would only have recovered $19,000-$20,000 or 3.8-4% of her original investment, resulting in a windfall of $30,000- $31,000 for the annuity issuer.

In this case, our clients testified that the plan sponsor never disclosed such information, even though ERISA 404(c) requires that a plan sponsor provide plan participants with “sufficient information to make an informed decision.

Annuity advocates argue out that plan sponsors are not required to meet the “sufficient information” requirement unless they wish to qualify for the special protections offered under 404(c). However, since plan sponsors are legally fiduciaries, they are required to disclose “all material information” to plan participants.²

The courts have consistently defined “material information” as any information which an investor would deem helpful in deciding whether to invest in a product.³ I believe that a reasonable investor would consider the foregoing information, the heavy odds against simply breaking even, resulting in the annuity owner subsidizing the annuity issuer rather then the annuity owner’s heirs, “material.”

Exhibit B
As bleak as that breakeven analysis is, a more accurate, and troubling, breakeven analysis is provided by factoring in both present value and mortality rate, the odds that the annuity owner will even be around to receive the annual distribution at a certain age. Going back to Exhibit A, we see that at age 86, the annuity owner would have recovered approximately $15,307, or 30% of her original investment. If we project out to age 100 (odds of 3.6-4%), the annuity owner would have recovered $17,218, or 34% of her original investment, leaving a nice windfall of $34,693 for the annuity issuer. Just as in Las Vegas, annuities are typically structured to ensure that the odds favor the “house.”

During your deliberations, ask yourself, would you consider such information “material” in making a decision as to whether to invest in the annuity. Then ask yourself whether the plan sponsor’s failure to ascertain these facts (a) as part of their legally required thorough and objective investigation and evaluation, and (b) the failure to disclose such information was “in the best interest of both the plan participants and their beneficiaries, or, rather, the third-party annuity issuer.

The plan sponsor admitted that they were not aware of such information and did not perform the necessary calculations themselves, that they blindly trusted the annuity broker’s advice and “expertise.” The courts have consistently warned plan sponsors or the dangers in such situations, especially when the reliance is on a commissioned salesperson:

Defendants relied on FPA, however, and FPA served as a broker, not an impartial analyst. As a broker, FPA and its employees have an incentive to close deals, not to investigate which of several policies might serve the union best. A business in FPA’s position must consider both what plan it can convince the union to accept and the size of the potential commission associated with each alternative. FPA is not an objective analyst any more than the same real estate broker can simultaneously protect the interests of “can simultaneously protect the interests of both buyer and seller or the same attorney can represent both husband and wife in a divorce.⁵

As the judge will advise you, “a pure heart and an empty head are no defense in a case involving allegations of a breach of fiduciary duties.”⁶ In layman’s terms, there are no mulligans, no do-overs in fiduciary law, If a plan sponsor is unable to perform their legally required fiduciary duties, they have a duty to find someone who is qualified to do so objectively.⁷

Experience shows that too often plan sponsors simply choose to blindly follow the recommendations of product vendors and rely on the pure heart/empty head defense. As mentioned earlier, the dangers involved in adopting this practice were previously addressed in the Gregg decision.

Fortunately, plan sponsors can now use AI to perform a preliminary evaluation of an annuity recommendation. Note: An AI generated breakeven analysis should never be used as a replacement for the legally required investigation and evaluation, but rather as a “red flag’ for the need to obtain the services of a trained, experienced professional who is willing to serve in a fiduciary capacity and provide a written documentation of his breakeven analysis.

Using ChatGPT and the previously discussed data, I generated a breakeven analysis using the following prompt:

Prepare a fiduciary breakeven analysis, in annual intervals, on a $50,000 immediate annuity paying $1,500 a year, factoring in both present value and mortality risk, for a 65 year old woman, assuming normal life expectancy

ChatGPT concluded that:

📌 Breakeven Points

1. Nominal Breakeven (Total Cash = $50,000)

Reached in: Year 34 (age 99)
This is when she would have received $50,000 in total cash payments (50,000 ÷ 1,500 = 33.3 years)

This “nominal” breakeven analysis is the typical misrepresentation that the annuity advocates argue and the typical deliberately flawed analysis used by online annuity breakeven calculators and their providers. Just divide the amount of the investment by the interest rate, willfully ignoring the concept of the time value of money.

However, as ChatGPT points out, the legally proper way of constructing a breakeven analysis on an annuity requires that both present value and mortality risk be factored in order to account for both the time value of money and the likelihood of the annuity owner actually being alive to receive the annual annuity payment.

2. Present Value Breakeven

Total PV of future payments equals $50,000 around year 25–26 (age ~90–91), without mortality, well beyond the annuity owner’s life expectancy.
But adjusting for mortality, the expected value (EV) of all future payments peaks below $50,000, around $14,600–15,000.

This suggests the “actuarial expected value” of the annuity for a typical 65-year-old woman is around $14,000–15,000, despite the upfront $50,000 cost. This also assumes that the annuity owner chose the “single life” distribution option to maximize the annuity’s distributions.

🎯 Key Takeaways

Metric	Value
Total nominal breakeven (no time discounting)	Age 99 (Year 34)
PV breakeven (no mortality)	Age 90–91
EV of annuity (with 3% discount & mortality)	~$14,600
Life expectancy (female, age 65)	~20 years

🧠 Interpretation

If she lives to 90+, the annuity becomes a good deal in real-dollar terms.
If she dies earlier, the insurer “wins” (keeps remainder of capital).
This is the trade-off of longevity insurance—it’s not about individual return maximization, but hedging the risk of outliving assets

So, the odds favor the “house” ultimately receiving the majority of the initial investment at the expense of the annuity owner and their beneficiaries, in blatant violation of ERISA 404(a)’s requirement that plan sponsors act in the best interest of both plan participants and their beneficiaries.

This type of estate asset erosion, loss of estate assets (here, approximately $35,400, or 72%, of the of the original investment, is exactly why estate planning attorneys often refer to annuities as estate planning “saboteurs,” depleting an estate of the assets needed to carry out the decedent’s last wishes. Remember, as fiduciaries, plan sponsors have a duty to disclose all material facts, or, as ERISA section 404(c) states “sufficient information to make an informed decision.”⁸You heard the plaintiffs state that the plan sponsor never met either of these standards.

ERISA requires a plan sponsor to acts as a prudent person would handle their own affairs.⁹ Ask yourself, does a prudent person invest $50,000 knowing that the odds are stacked against them, that the likelihood is that they are going to lose $72% of their investment in favor of the annuity company, to essentially subsidize the annuity issuer at the expense of one’s intended heirs.

Equally egregious is the fact that the plan sponsor claims to have included the annuity in the plan to help plan participants receive retirement income, yet admitted that it did not take the time to determine whether the annuity was actually in the best interests of said parties by performing these simple calculations despite the ready availability of such tools. The plan sponsor’s indifference and failure to properly perform the required investigation and evaluation is a blatant breach of their fiduciary duty of loyalty, which requires a plan sponsor to always put the best interests of both the plan participant and their beneficiaries first and foremost, ahead of the best interests of both the plan sponsor and any third parties.¹⁰

In our example, the plan sponsor stand to receive 76% of the original investment compared to the plan participant’s 24%. I submit to you that such an inequitable result was both clearly foreseeable had the plan sponsor taken the time to properly perform the required investigation and evaluation of the annuity. The law clearly states that in determining whether a fiduciary breach occurred, the plan sponsor will be held liable for what they knew, or should have known, had they simply conducted the proper investigation and evaluation of the investment product.¹¹

Ladies and gentleman, you will have the opportunity to review both the testimony offered in this case, and the charts of our forensic calculations in the jury room during your deliberations. We ask that unlike the plan sponsor, you understand the importance of this case and its consequences upon the financial security of the plaintiffs.

Today, you have more power than you will probably have at any other time in your life. This is the only chance that the plaintiffs have of receiving justice.

The late General Norman Schwartzkop once said

“The truth is that we always know the right thing to do. The hard part is doing it.”

Ladies and gentlemen, that is all the plaintiff is asking of you today. Objectively review and consider the testimony and the evidence in this case, and do the right thing.”

I am frequently asked about the most common fiduciary risk management mistake that i see investment fiduciaries make. By far, the most common mistake I see is the failure to understand what is and is not legally required. As a result, investment fiduciaries constantly expose themselves to unnecessary fiduciary liability.

Often, that is a result of misplaced trust, blindly following the recommendations and advice of parties that do not owe any fiduciary duty to the investment fiduciary. As I have previously posted, NAIC Rule 275, the applicable insurance rule covering fiduciary duties not only does not expressly cover annuities, it expressly exempts ERISA pension plans from requirements of the Rule.¹² As a result an annuity broker can claim to be in compliance with Rule 275, even though the advice and product recommendations provided may actually result in a fiduciary breach for the plan sponsor. This reinforces the need for plan sponsors to heed the warning set out in the Gregg decision.

I believe that the situation that many plan sponsors unknowingly may find themselves in is accurately summarized in this snippet from the famous cartoon, “Pogo.”

There is nothing in ERISA or any other law or regulation that expressly requires a plan sponsor to address retirement income or to include annuities providing within a 401(k) or other type of ERISA plan. Furthermore, prudent plan sponsors will realize that such products are available outside the plan, without potentially exposing the plan to fiduciary liability.

As noted fiduciary attorney, Fred Reish, likes to say – “Forewarned is forearmed.” And as I advise InvestSense’s fiduciary risk management clients, “do the math or use AI to do the math!” Or, better yet, if approached by an annuity vendor, let them do the math for you.

When approached by an annuity vendor, insist that before you will even consider their annuity recommendation, they have to provide you with a written breakeven analysis, one that factors in both present value and mortality risk. The fact that you routinely requested a written analysis can be used, if necessary, as proof that the plan sponosr did have a prudent process in place. However,odds are that they are not going to do it, as it would expose the imprudence of the annuity. However, if the annuity broker does provide a written analysis, always have it reviewed for accuracy. Again, further proof of reasonable reliance and a prudent process.

As mentioned earlier, the days of blind reliance on conflicted advice from product vendors and claims of altruistic intent by a plan sponsor, aka the “pure heart, empty defense,” are over. Hopefully, the final nail in the coffin will occur once SCOTUS hear the Pizarro v. Home Depot case later in the Court’s current term. I am on record as stating that I believe the Court will adopt the standard set out in Section 100 of the Restatement (Third) of Trusts, that being that the burden of proof on the issue of causation shifts to the plan sponsor once the plan participants establish the fiduciary breach and a resulting financial loss.

Selah

Notes
1. Liss v. Smith, 991 F. Supp. 278 (S.D.N.Y. 1998); Fink v. National Savings Bank,, 772 F.2d 951 (D.C. Cir. 1985).
2. Bins v. Exxon Corp., U.S.A, 220 F.3d 1042 (9th Cir. 2000); Donovan v. Bierwirth, 680F.2d 263 (2d Cir. 1982.
3.Bins, supra: Varity Corp. v. Howe, 516 U.S. 489 (1996)
4. TSC Industries v. Northway, Inc. 426 U.S. 438 (1976)
5.Donovan v. Cunningham, 716 F.2d 1455, 1467 (S.D.Tex. 1983)
7. Gregg v. Transportation Workers of America Int’l, 343 F.3d. 833, 841.
8. ERISA Section 404(a)
9. Bierwirth,supra.
10. Bierwirth, supra
11. ERISA Section 404(a.)
12.NAIC Rule 275.

Posts
“A Fiduciary’s Guide to Annuities – Why Go There?” https://fiduciaryinvestsense.com/2024/07/21/a-fiduciarys-guide-to-annuities-why-go-there/

Exhibit B

Posted in ERISA, ERISA litigation, fiduciary responsibility, fiduciary prudence, fiduciary duties, fiduciary litigation, 401k, 401k plans, plan sponsor, plan sponsors, fiduciary law, fiduciary liability | Tagged 401k, 404c compliance, ERISA, fiduciary law, Fiduciary prudence, fiduciary responsibility, fiduciary riskmanagement, plan sponsor | Leave a comment

Closing Argument: Humble Arithmetic, Common Sense, and Fiduciary Responsibility vs. In-Plan Annuities

Posted on October 13, 2025 by jwatkins

“Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passion, they cannot alter the state of facts and evidence.” – John Adams

He fell at last a victim of the relentless ruless of humble arithmetic. Remember, O stranger: ‘Arithmetic is the first of the sciences and the mother of safety’- Justice Louis Brandeis

Mathematics is the light that reveals the nature of things.”- Justice Louis Brandeis

Closing Argument: Humble Arithmetic, Common Sense, and Fiduciary Prudence vs. In-Plan Annuities

“Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passion, they cannot alter the state of facts and evidence.” – John Adams

He fell at last a victim of the relentless ruthless of humble arithmetic. Remember, O stranger: ‘Arithmetic is the first of the sciences and the mother of safety’- Justice Louis Brandeis

Mathematics is the light that reveals the nature of things.”- Justice Louis Brandeis

“May it please the court. At issue in this case is whether the plan sponsor breached their fiduciary duties of prudence and loyalty by including annuities within the company’s 401(k) plan.

During this trial, we have introduced testimony and numerous exhibits that clearly establish that annuities are typically structured to benefit the annuity issuer, not the annuity owner. This is exactly why annuity issuers pay such a high commission to those who can convince a plan to offer annuities within their plan.

The evidence and the mathematics that we have introduced in this case clearly establish that the annuity offered within the plan not only was not in the best interest of the plans’ participants or their beneficiaries, but also that had the plan sponsor performed the legally required independent and objective investigation and evaluation required by ERISA, the resulting harm was easily foreseeable using basic mathematical skills, i.e., humble arithmetic.

Reviewing Exhibit A, a basic Microsoft Excel breakeven analysis on an immediate $50,000 annuity, based solely on present value, paying 3% ($1,500) annually, for a 65 year old woman, with a normal lifetime expectancy (20.7 year). The data indicates that the odds of her reaching the age of 86, are 63%. Should that occur, at age 86, our Excel present value calculation predicts that the annuity owner would have only recovered approximately $18,076.80 , or 36% of her original value. If we assume that the annuity owner chose a “life only” option in order to receive a higher annual distribution payment, that would result in a potential windfall of $31,923.20 for the annuity issuer. Multiply that by the potential number of owners of that particular annuity in the plan and you understand why the annuity industry is trying to make inroads into 401(k) plans and other ERISA pension plans.

The second part of the fiduciary breach equation in this case involves determining whether and when the annuity owner would actually break even by recovering the full amount of her $50,000 original investment. In this case, lets examine the situation if the 65 year old female participant lives to age 100. According to the Social Security Administration (SSA) Period Life Table:

A 65-year-old woman has about a 3.6% to 4% chance of living to age 100.

In this case, our clients have stated that the plan sponsor never disclosed such information, even though ERISA 404(c) requires that a plan sponsor provide plan participants with “sufficient information to make an informed decision.

Annuity advocates point out that plan sponsors are not required to meet the “sufficient information” requirement unless they wish to qualify for the special protections offered under 404(c). However, since plan sponsors are legally fiduciaries, they are required to disclose “all material information” to plan participants.

The courts have consistent defined “material information” as any information which an investor would deem helpful in deciding whether to invest in a product.# I believe that a reasonable investor would consider the foregoing information, the heavy odds against simply breaking even, resulting in the annuity owner subsidizing the annuity issuer rather then the annuity owner’s heirs, “material.”

The plan sponsor has admitted that they were not aware of such information and did not perform the necessary calculations themselves, that they blindly trusted the annuity broker’s advice and “expertise.” The courts have consistently warned plan sponsors or the dangers in such situations, especially when the reliance is on a commissioned salesperson:

Defendants relied on FPA, however, and FPA served as a broker, not an impartial analyst. As a broker, FPA and its employees have an incentive to close deals, not to investigate which of several policies might serve the union best. A business in FPA’s position must consider both what plan it can convince the union to accept and the size of the potential commission associated with each alternative. FPA is not an objective analyst any more than the same real estate broker can simultaneously protect the interests of “can simultaneously protect the interests of both buyer and seller or the same attorney can represent both husband and wife in a divorce.#

As the judge will advise you, “a pure heart and an empty head are no defense in a case involving allegations of a breach of fiduciary duties.”# In layman’s terms, there are no mulligans, no do-overs in fiduciary law, If a plan sponsor is unable to perform their legally required fiduciary duties, they have a duty to find someone who is qualified to do so objectively.

Experience shows that too often plan sponsors simply choose to blindly follow the recommendations of product vendors and rely on the pure heart/empty head defense. The dangers involved in adopting this practice were previously addressed in the Gregg decision, in which the court warned plan sponsors of the issues of relying on annuity brokers and other commissioned salespeople

Using ChatGPT and the previously discussed data, I generated a breakeven analysis using the following prompt:

ChatGPT concluded that:

📌 Breakeven Points

1. Nominal Breakeven (Total Cash = $50,000)

Reached in: Year 34 (age 99)
This is when she would have received $50,000 in total cash payments (50,000 ÷ 1,500 = 33.3 years)

2. Present Value Breakeven

Total PV of future payments equals $50,000 around year 25–26 (age ~90–91), without mortality, well beyond the annuity owner’s life expectancy.
But adjusting for mortality, the expected value (EV) of all future payments peaks below $50,000, around $14,600–15,000.

🎯 Key Takeaways

Metric	Value
Total nominal breakeven (no time discounting)	Age 99 (Year 34)
PV breakeven (no mortality)	Age 90–91
EV of annuity (with 3% discount & mortality)	~$14,600
Life expectancy (female, age 65)	~20 years

🧠 Interpretation

If she lives to 90+, the annuity becomes a good deal in real-dollar terms.
If she dies earlier, the insurer “wins” (keeps remainder of capital).
This is the trade-off of longevity insurance—it’s not about individual return maximization, but hedging the risk of outliving assets

This type of estate asset erosion, loss of estate assets (here, approximately $35,400, or 72%, of the of the original investment, is exactly why estate planning attorneys often refer to annuities as estate planning “saboteurs,” depleting an estate of the assets needed to carry out the decedent’s last wishes. Remember, as fiduciaries, plan sponsors have a duty to disclose all material facts, or, as ERISA section 404(c) states “sufficient information to make an informed decision.” You heard the plaintiffs state that the plan sponsor never met either of these standards.

ERISA requires a plan sponsor to acts as a prudent person would handle their own affairs. Ask yourself, does a prudent person invest $50,000 knowing that the odds are stacked against them, that the likelihood is that they are going to lose $72% of their investment in favor of the annuity company, to essentially subsidize the annuity issuer at the expense of one’s intended heirs.

Today, you have more power than you will probably have at any other time in your life. This is the only chance that the plaintiffs have of receiving justice.

The late General Norman Schwartzkop once said

“The truth is that we always know the right thing to do. The hard part is doing it.”

Ladies and gentlemen, that is all the plaintiff is asking of you today. Objectively review and consider the testimony and the evidence in this case, and do the right thing.”

Often, that is a result of misplaced trust, blindly following the recommendations and advice of parties that do not owe any fiduciary duty to the investment fiduciary. As I have previously posted, NAIC Rule 275, the applicable insurance rule covering fiduciary duties not only does not expressly cover annuities, it expressly exempts ERISA pension plans from requirements of the Rule. As a result an annuity broker can claim to be in compliance with Rule 275, even though the advice and product recommendations provided may actually result in a fiduciary breach for the plan sponsor. This reinforces the need for plan sponsors to heed the warning set out in the Gregg decision.

I believe that the situation that many plan sponsors unknowingly may find themselves in is accurately summarized in this snippet from the famous cartoon, “Pogo.”

As noted fiduciary attorney, Fred Reish, likes to say – “Forewarned is forearmed.” And as I advise InvestSense’s fiduciary risk management clients, “do the math!”

Selah

Posted in fiduciary compliance | Tagged finance, investing, money, travel | Leave a comment

DOL Advisory Opinion 2025-04A: Don’t Be Stupid!

Posted on September 29, 2025 by jwatkins

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

As a fiduciary risk management counsel, I read the DOL’s recent Advisory Opinion 2025-04A (Opinion) with great interest. As I read the opinion, I kept remembering my father’s advice – “The good Lord gave you a brain for a reason. Use it! Don’t be stupid.” In other words, always strive to make well-reasoned decisions.

Along those same lines, one of my main messages to our clients is to avoid unnecessary fiduciary risk exposure. To that end, InvestSense recommends that plan sponsors always use a simple two question analysis as a first step in evaluating potential investment options for their plan.

1. Does ERISA require a plan to offer the investment product or strategy in a plan? Hint: ERISA does not specifically require that any specific investment product or strategy be offered within a plan, only that each product offered within a plan be legally prudent.

2. If the product or strategy is not legally required to be offered within a plan, would/could offering the product or strategy expose the plan to unnecessary fiduciary risk? If so, why go there? Don’t go there! Don’t be stupid! Smart people do not valuntarily assume unnecessary risk. Thus, our directive for fiduciaries to Keep It Simple & Smart, or KISS.

Upon reading the Opinion, one particular sentence immediately stood out to me:

For participants who do not make a [SIP] allocation selection, the plan sponsor selects a default allocation percentage.” SIP refes to the annuity component in the investment at issue in the Opinion. Selecting investments for a plan is one thing. Any language calling for plan sponsors to become actively involving in making allocation decisions is a definite red flag, especially when the product itself is suspect as to fiduciary prudence.

While the Opinion seems to indicate that a plan participant can subsequently revise the percentage chosen by a plan sponsor, the complexity of the product itself and the likelihood of confusion of a plan participant raises numerous fiduciary litigation red flags as to potential litigation . The product fails the two question test.

With no legal obligation to offer the product, the prudent choice for a plan sponsor is not to do so at all, as plan participants interested in said product can do so outside of the plan, without exposing the plan to unnecessary and unwanted fiduciary liability.

Another reason for my position is the inconsistency between the standards set out in NAIC Rule 275 and ERISA 404(a). As I discussed the in an earlier post.¹ The inconsistency clearly allows for the possibility that a broker’s recommendation may be compliant with Rule 275, while non-compliant with ERISA 404(a). As a result, the broker’s recommendation may actually result in a fiduciary breach by, and resulting liability for, the plan sponsor.

In managing fiduciary risk, InvestSense stresses the importance of two court decisions, one in connection with actively managed mutual funds, the other in connection with annuities. Both decisions are widely cited by courts across the country, The annuity case is Gregg v. International Transportation Workers of America, in which the court explained the need for pension plans to proceed in caution when considering recommendations involving annuity brokers:

Insurance brokers [like FPA] do not work for a pension plan; rather, insurance companies like Transamerica pay individual insurance broker a salary. As a broker, FPA and its employees have an incentive to close deals, not to investigate which of several policies might serve the union best. A business in FPA’s position must consider both what plan it can convince the union to accept and the size of the potential commission associated with each alternative. FPA is not an objective analyst any more than the same real estate broker can simultaneously protect the interests of both buyer and seller or the same attorney can represent both husband and wife in a divorce.”²

Because of the obvious conflict of interest issues created whenever commissions are involved, I would suggest that all investment fiduciaries heed the Gregg court’s warning. For investment fiduciaries, it is always best to avoid even the appearance of impropriety. As Judge Cardozo pointed out in the legendary fiduciary decision of Meinhard v. Salmon:

Many forms of conduct permissible in a workaday world for those acting at arm’s length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the “disintegrating erosion” of particular exceptions). Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd.³ (citation omitted)

In other words, avoid even the appearance of impropriety.

This DOL Opinion has no impact on anyone other than the parties involved and does not compel any action on the part of other plan sponsors. As a result of the issues identified herein, we have advised our clients to ignore both this Opinon and the product involved.

Why go there? Don’t go there! Don’t be stupid!

Notes
1. https://fiduciaryinvestsense.com/2025/09/15/erisa-404a-vs-naic-rule-275-wake-up-call-or-ticking-fiduciary-litigation-liability-time-bomb-for-plan-sponsors/
2. Gregg v. Transportation Workers of Am. Intern, 343 F.3d 833, 841 (6th Cir. 2003).
3. Meinhard v. Salmon, 249 N.Y. 458, 464 (1928).

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The Prudent Investment Fiduciary Rules

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

DOL’s Betrayal of American Workers Sends a Clear Message to American Workers: We Really Don’t Give a Damn About You!

Implications of Section 78(3) of the Restatement (Third) of Trusts and the Expanding “Knew or Should Have Known” Liability Standard in the Era of AI

Closing Argument: Humble Arithmetic, Common Sense, and Fiduciary Responsibility vs. In-Plan Annuities

DOL Advisory Opinion 2025-04A: Don’t Be Stupid!

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