In this episode Jeff interviews Chris Tobe, CFA, CAIA, about the biggest ERISA and retirement-plan risks today: low‑paying fixed annuities that hide large undisclosed insurer spreads, heavy private‑credit exposure inside insurance general accounts, and the hidden fiduciary pitfalls of contract‑based investments (annuities, private equity, crypto). They explain why mid‑sized plans are especially vulnerable, why target‑date funds deserve careful “under the hood” due diligence—especially as providers migrate to lightly regulated state CITs—and what fiduciaries and advisors should watch for to reduce litigation risk. Plus: a quick look at Chris’s new documentary, Pension Fight Club, which exposes secrecy and hidden fees in public pensions.
Jeffrey Snyder, Broadcast Retirement Network
Chris, it’s great to see you.
Thanks for joining us in the program this morning.
Chris Tobe, CFA, CAIA, The Hackett Group
Great to be back here again, Jeff.
Jeffrey Snyder, Broadcast Retirement Network
You know, I always like getting the pulse, if you will, of the ERISA litigation. There’s so much going on, and I know this is an area that you have a lot of expertise in. Let me ask you a basic question.
What’s going on in the world of ERISA litigation? Are you seeing a lot of new trends, existing trends? What’s moving the needle for you?
Chris Tobe, CFA, CAIA, The Hackett Group
Again, I specialize in the area around annuity products. So again, I’m a little focused in that. And so that tends to be in, and we’ve talked about this before, the 401k market is very different on the size.
You get these mega plans that are the multi-billions. They’re being sued for different things. And as we go down to plans under a billion, like from 100 million to a billion, that’s where I’ve been kind of concentrating on.
These are a lot of regional hospitals, things like that, where I’m finding fixed annuities that are paying 2% and should be paying 4%. So that’s been my main trend. But we’ve seen in the larger, and again, the media is really focused on the mega plans.
And a lot of the plaintiff attorneys just go after little bitty things with the mega plans. Like I think forfeitures, I never thought there was anything to them. I’ve been around the business forever.
Forfeitures to me were never really material, but if a plan’s big enough, it can show some dollars. And I just think that is a wrong place to focus in the litigation area for all sides, because I just don’t think it’s an issue. The real issue to me are fees being paid out of the investment options, and how do we do the best thing for participants there by in general, minimizing fees to where we can.
Jeffrey Snyder, Broadcast Retirement Network
So let me ask you about, I wanna get to that last piece in a second, but let me go back to the fixed annuities. You mentioned they may be, these fixed annuity products are inside the plan themselves. They’re paying 2%, but the spread is bigger.
What is that? How would you define that? How do you find that if someone’s out there saying, hey, maybe that impacts my plan that I’m in.
I’m not a billion dollar plan, but what does that materially mean?
Chris Tobe, CFA, CAIA, The Hackett Group
Well, I’ve spent a lot of time on spread. Again, I spent seven years at Transamerica making these products. And the spread is one of the most heavily guarded secrets in the industry.
No one discloses the spread anywhere. But how life insurance companies make spread is basically they invest in a lot of private credit, which has gotten a lot of attention lately. If they get high returns out of this private credit and private mortgages, and they’re making maybe 6%, 7% on that, then they’re paying out 2% in the annuity and the difference is the spread.
But since we can’t litigate around spread, it’s secret. There’s such a difference in spread. TIAA-CREF tends to have the lowest amount of spread.
It has returns around 4%, 5%, whereas some of the other insurers out there, just the normal names, the Peru, Princeton, Transamerica, all of them, a lot of times they will have varying rates on the fixed annuities, could go anywhere from 2% to 4%, depending on what I think they think they can get away with. So it’s a pricing mechanism. And so in most of the litigation, I’m taking the difference between the spread on that the plan’s actually getting and the best annuity available out there, which is usually TIAA and sometimes it’s mass mutual, and we take a look at the difference there and that’s where we’re getting the damages in the lawsuit.
Jeffrey Snyder, Broadcast Retirement Network
So you mentioned private credit. I wanna ask you about that because I have seen some of the articles. I had AM Best on the program, I think a month or two months ago.
They had raised some concerns about private credit inherent in these insurance general accounts. How, from your perspective, as someone who built products, now you evaluate products, and you’ve been doing this for probably longer than I have, candidly, no offense, but what does this mean? I mean, is this across the industry?
Is it a concern for fiduciaries, for consultants like yourself, or what we call now retirement plan advisors, do they need to be looking under the hood or is AM Best just off the mark?
Chris Tobe, CFA, CAIA, The Hackett Group
Oh no, I think AM Best is downplayed. I think it’s far worse than what AM Best says. We had the insurance, God, I forget the name, that defaulted a couple of weeks ago that NBC did the story on.
And so that can happen to almost any annuity. So these are the highest risk products in the 401k world because they’re backed by private credit and a lot of other type of investments are kind of like private credit. They’re not traditional treasuries in high-grade corporates.
That’s a real myth that insurance companies, less than 10, 20% of their portfolios are actually high-grade fixed income. The rest is really crap, worse than junk, private credit and so on. And so if we have a default there, people could lose everything in these annuities.
And so that’s where I’m focusing everything on is that these annuities, I think are actually prohibited transactions because of the single entity credit risk and liquidity risks that participants are taking.
Jeffrey Snyder, Broadcast Retirement Network
Let me ask you, how does this frame, there’s a lot of conversation about retirement income products, maybe a little bit different type of vehicle in the sense that they’re not individual annuities. These are part of a group structure. But does this mean that there’s an extra layer of validation or due diligence that a fiduciary or their investment advisor should really look at when they’re evaluating?
Because all these products are different, Chris. I mean, they all have different constructs, they have different investment guarantees, et cetera. So does this level rise to the level of additional due diligence?
Or need for, I’m sorry.
Chris Tobe, CFA, CAIA, The Hackett Group
Again, my advice is to avoid all annuities, which would include any of these life cycle options or whatever you call them, the lifetime annuities. Let people buy them outside the plant, which some people have done that for years. If people wanna cash out and buy them themselves, they can, but you’re just taking on unneeded fiduciary risks by putting these in a plant.
Now, again, I think there’s a lot of bait and switch because I look, for litigation, I look at these 8,000 largest plants. The amount of assets that are in lifetime annuities is less than 1%. The amount of private equity is less than 4%.
It’s almost 95% of what I’m finding, and not in every plant. This is about a third of the plans I’m finding fixed annuities, and that’s where all the exposure is. And part of that is because their underlying private credit and the structure, this contract structure, which I think causes prohibited transaction issues in 401k plants.
Anything that’s a contract, which is a annuity, a private equity, private credit. And then I guess crypto is a contract without the paper. It’s really what it is.
Jeffrey Snyder, Broadcast Retirement Network
Yeah, literally. Literally, it’s a digital asset. Let me kind of fast forward.
Area that I wanted to ask you about is Targeted Day Funds. You and I have lived through the proliferation. I don’t even know how else to describe it, but it originally sold as, I would say, the romp appeal, said it and forget it.
A lot of people are, it’s a default investment in so many retirement plans. But is there a need for additional due diligence there? I mean, there’s been talk about including additional asset classes in these constructs.
So again, do I need to be looking under the hood there? They’re not inherently bad products. I mean, they themselves are not inherently bad, but I probably should take a look at them if I’m a fiduciary.
Chris Tobe, CFA, CAIA, The Hackett Group
Yes. And since 50% of assets are in Target Day Funds. That’s a lot.
By not looking under the hood, you’re basically, that’s the biggest fiduciary breach we have out there right now. It’s the biggest risk. And again, a great new piece from the CFA Institute came out this week, which talks about really emphasizing on the new 401k fiduciary, looking under the hood at Target Day Funds.
Because Target Day Funds can be, a lot of them are very good, but you have to look under the hood. And a lot of the litigation is really stupid around Target Day Funds, because again, we know 90% of returns comes from asset allocation. So there’ll be some of these plaintiff attorneys have found a Target Day Fund that has a lower equity allocation.
A 2040 fund for one may be 70% equities, 60% equities for another. And then during a period where equities outperform, it all of a sudden turns into this big under performer, even though it may be lower fees and a better fund. So that was a lot of that BlackRock litigation, which I thought was kind of stupid, because the plaintiff attorneys are not talking to investment experts.
They’re not looking under the hood either. And so you make mistakes when you don’t look under the hood. And so everything comes down back to that.
And that’s a really, and then the other issue I’ve talked about a lot is that SEC regulated mutual funds are one of the very good structures and they don’t allow crap in Target Day Funds. And that I mean by crap, I mean private equity, annuities, things like that, because- Technical term, that’s jargon, right? That’s industry jargon.
Yeah, that’s jargon, yeah, crap. They have accounting standards. But the, so the move is to go to state regulated collective investment trust, which basically have no regulation.
And so that the move in Target Day Funds has been to those. Now, some of them are really well run of these state CITs, the Vanguard, the Fidelity products are just, they’re basically clones of the mutual fund. But some of the insurance ones are starting to sneak annuities in there, sneak.
And this is where they’re gonna try to sneak the lifetime annuities and the private equity into these poorly regulated state CITs. And I just think that’s a pretty planned sponsor. That’s just something you need to watch and look out for really, what is the structure you’re investing in?
Are you, what are you in? And most people, a lot of advisors don’t know they may be in some insurance product or a state regulated CITs. It’s important who the regulator of that investment is.
Jeffrey Snyder, Broadcast Retirement Network
So let me ask you about that because I did a show with a peer of ours, Rick Rogers. He’s a principal over at Invest. It was a great show.
He kind of gave me, similar to you, you really gotta get under the hood. What would be the downside between a state regulation or state regulated, other than there are 50 states versus the SEC? Is it a lack of uniformity that exists between the 50 states and the way that the regulators look at it?
What is really the opposition to that?
Chris Tobe, CFA, CAIA, The Hackett Group
Now, there are federally regulated CITs through the office OCC, but the vendors are avoiding them because they do have rules and structures in a common structure. So that’s why they’re going to state. I’m afraid that we’ll have like, when I worked at Transamerica, we could pick, I was an officer at seven different insurance companies, one in Iowa, one in New York, one in some other places.
And we would pick the state with the easiest regulations, the lowest capital requirements. So you’d be able to, it basically becomes a race to the bottom among all 50 states, just like insurance and annuity regulation for this CIT regulation is who’s gonna allow the most, look the other way at the worst stuff, we’ll get those type of business in kind of a race to the bottom is what I fear.
Jeffrey Snyder, Broadcast Retirement Network
Yeah, and let me ask you, you talked about the 8,000 top plans. I wanna go back to something we talked about last time, and you may not, you probably recall much of our last conversation, but these pulled employer plans, they tend to be advisor driven. They’re growing as far as I can tell.
Is that an area of concern from an ERISA perspective? Not a lot, I mean, they’re growing, they’re not billions of dollars there, but at some point, Chris, they will be, I mean, maybe in our lifetime.
Chris Tobe, CFA, CAIA, The Hackett Group
Well, but it’s the same underlying issues. Do we have transparency through to the security level? With an SEC mutual fund, even like a target date, you can almost look through back to the individual sections, the fixed income, the equity, and go back and look at individual securities and take it all the way back to the security level.
But when you have contracts in these, whether they’re annuity contracts, private equity contracts, private credit contracts, or crypto, which is an invisible contract, you don’t have the transparency back to the underlying securities. And I think that’s the key, and that’s the same thing I would look in all those pet plans, is back to having transparency and figure out who’s making the fees and where.
Jeffrey Snyder, Broadcast Retirement Network
Yeah, it’s so important. I mean, not to interrupt you, but from an advisor point of view, I’d wanna know that if I was advising and accepting 321, or more importantly, 338 due diligence. I mean, that puts me at risk if I don’t know what’s in there.
Chris, I have about a minute and a half, two minutes left. I wanna talk, you started a movie career. Am I correct about that?
Do you wanna hit on the movie that you and your colleagues created? I don’t wanna, can’t go too in depth, but talk a little bit about that and what you did, because I see Hollywood in your future, or maybe it is current.
Chris Tobe, CFA, CAIA, The Hackett Group
Yeah, it’s coming though. So the movie’s called Pension Fight Club, and this is another area besides 401k that I’ve specialized in is public pensions, especially the private equity and alternatives and public pensions. I wrote a book, Kentucky Fried Pensions, and this movie was just really fun.
There’s about 20 people in it. We have trustees from plans all over the country, a few public officials, treasurers, and it kind of goes back and forth, and I’ve got 12 different appearances in it, but a lot of other people have 10 or 12, but they’re real short sound bites. And we talk about the different issues about secrecy and transparency and private equity, the same underlying things that I’m talking about in 401k is these contracts, the public plans refuse to, as a trustee, I wasn’t even allowed to see the private equity contract.
That’s how secret it was. Again, it was because I think it violated state fiduciary laws and had up to 600 basis points in secret fees in these things. So again, this is the same underlying issue of contracts instead of securities, lack of transparency that I’m seeing in 401k, we’re seeing in the public pension with taxpayer money.
Jeffrey Snyder, Broadcast Retirement Network
And lastly, Chris, where do we watch this movie? Do I have to go to AMC or can I get it streaming on Netflix?
Chris Tobe, CFA, CAIA, The Hackett Group
Oh, it’s pensionfightclub.com. Pension Fight Club, Brad Pitt?
Jeffrey Snyder, Broadcast Retirement Network
No.
Chris Tobe, CFA, CAIA, The Hackett Group
Yeah, well, but you know. Ed Norton, Brad Pitt. But unlike that fight club, you can talk about this fight club as much as you want.
Jeffrey Snyder, Broadcast Retirement Network
I like that.
Chris Tobe, CFA, CAIA, The Hackett Group
But it’s on the website and it’s $9 for the full hour and a half, but you can go to the website and get our two and a half minute trailer to get a real good feel for it. I think a lot of people just take a look at the trailer and then if you really want to dive deeper, you can buy the movie there at pensionfightclub.com.
Jeffrey Snyder, Broadcast Retirement Network
Yeah, I would just say, I think we live in an era of greater transparency, greater transparency in terms of our investments, government, and a lot more. I don’t want to get political, but I tend to believe that people want to know and they want to get under the hood. Chris, always great to see you.
Thanks for making a few minutes with us and congratulations on your movie career. We look forward to having you back on the program again very soon.
Chris Tobe, CFA, CAIA, The Hackett Group
Excellent. It’s always good.