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

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!

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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.