Dad’s Retirement Plan: Learning About The TIAA-CREF Traditional Annuity
While visiting the parents, I was also asked to provide some input on their retirement savings. I don’t want to invade their privacy, but I’m sure they share common concerns with others out there. My father, who is in the non-profit/education sector, has much of his retirement money with TIAA-CREF (Teachers Insurance and Annuity Association - College Retirement Equities Fund). They are one of the biggest financial services companies in the U.S., and are operated on a non-profit basis.
As you might guess from their name, a very popular option for members is the TIAA Traditional Annuity, holding over $163 billion. I was not at all familiar with this beast, so I decided to learn more about it. Here’s a quick rundown from the website:
A guaranteed annuity backed by TIAA’s claims-paying ability, TIAA Traditional guarantees your principal and a minimum interest rate, plus it offers the opportunity for additional amounts in excess of the guaranteed rate. TIAA has credited additional amounts of interest every year since 1948.
The annuity primarily invests in publicly traded bonds, commercial mortgages, direct loans to business, and real estate. It has no loads, no surrender charges, no maintenance fees, and very low annual operation expense ratios of about 0.25%. (Sources: SURS, Dixie State Univ. )
Accumulation Stage
So you invest in this annuity, your account value will never decrease as long as TIAA is around. In fact, it will go up in value by at least 3% every single year, and most likely more depending on market conditions. Think of the savings on antacids during the next stock bubble! There are two tiers of performance - From what I understand, the higher paying tier is for money that is contributed directly by the employing company or group, whereas the lower paying tier is for voluntary contributions from the individual. Here are the historical returns:
For comparison, the venerable Vanguard S&P 500 Index Fund (VFINX) has a 10-year trailing return of 7.05%, and the Vanguard Total Stock Market Index Fund (VTSMX) has a 10-year return of 7.60%. The Vanguard Total Bond Market Index Fund (VBMFX) has a 10-year return of 5.74%.
Withdrawal Stage
When you reach retirement and are ready to start take money out of your annuity, you have a variety of options. There are one-lifetime income options, two-lifetime income options, fixed-period (ex. 10-year) income options, interest-only payments, and also a few others involving taking a lump-sum or just the required minimum distributions.
Of course, all annuities are simply a promise, not a 100.00% guarantee. In this regard, TIAA does have the highest possible credit ratings from all the major agencies: A++ by A.M. Best, AAA by Fitch, Aaa by Moody’s, and AAA by S&P.
Summary
Overall, it was very interesting learning about this additional investment option. Here were my tentative opinions:
- There is an expected trade-off of lower long-term performance in exchange for a guaranteed minimum return if you purchase this annuity. For those with longer time horizons and the discipline to ride out the market’s ups and downs, it may be better to invest in low-cost stock/bond mutual funds or ETFs instead. Those that are very risk-averse will love this investment.
- The lifetime income options are nice and reliable, but you could also do the same with a portion or all of any retirement portfolio. Just cash out your stocks and bonds, and go buy an immediate annuity with a lifetime payout option.
- Still, if you’re going to buy such an annuity, TIAA-CREF offers some of the best and safest returns along with the lowest fees available in the annuity marketplace.
- As my father is nearing retirement and I think the safety of this investment is very comforting to him, I think this option will work adequately for him. The majority of his annuity holdings are also in the higher-paying tier. I am, however, providing him some guidance in the rest of his portfolio to provide some diversification, as well as telling him what questions to ask his group’s financial advisor.
Find more in Investing, Retirement | 7/9/07, 9:29pm | Trackback
July 10th, 2007 at 5:23 am
Just curious, since I’m also a TIAA-CREF investor… I’ve found their fees favorable, and I’ve been happy with my investment options. But have you found their service good?
I wonder, because I’ve found their customer web site lacking. It frequently shows incorrect information about my contributions, not showing transactions that I have made or sometimes showing “phantom contributions” that I have not made. In their defense, the totals always seem to be correct.
I’ve made simple inquiries about my account and had to wait months for a reply. (Like, “If I take a distribution from my Roth IRA through the web site, will it be a principle-first withdrawal?”)
And they’ve botched up a recharacterization of contributions I made last year. At the end of the year I discovered that I couldn’t make Roth contributions and they had to be recharacterized as Traditional contributions. It took them months to do it, and naturally none of it appears correctly on the web site. Finally, they reported it incorrectly to the IRS and it I’ve been waiting for over a month now for a corrected 5498 statement. At least they told me up front that my new 5498 would probably have to be handled manually, and it would take a long time.
I have the bulk of my retirement assets with TIAA-CREF, but I find it less than comforting to endure mess-ups with my account. Really, the one thing you want to know is that your investments are safe (up to the inherent risk of your portfolio selection of course).
Personally, this year I’m making my retirement contributions with another company. I suppose that’s just another kind of diversification.
July 10th, 2007 at 6:54 am
I had the opportunity to use TIAA-CREF or Fidelity. I chose Fidelity because my RothIRA is there. Also, since I only plan on staying in the education sector for a little while, should I just stay with Fidelity? Or would it be worthwhile to invest a little with TIAA-CREF?
July 10th, 2007 at 7:56 am
Good timing, Jonathan. I am starting a job at state university next week, and TIAA-CREF is the company they use for their “Voluntary” retirement program (participation in the pension program is compulsory.) Fortunately, my future employer allows me to make my contributions to mutual funds (the CREF side) instead of annuities. I will want to stick with the mutual funds instead of the annuities, won’t I? I’ve checked out their mutual fund offerings and they seem to have performed pretty well and have very low costs. Any help from any poster is appreciated.
July 10th, 2007 at 10:03 am
I’ve found the annuities to be fine investments, comparable to their mutual funds. I’d not favor one type of investment over the other because of that distinction, but rather on the usual things like acceptable risk and low fees. The only thing special about the annuities is that when you retire you have the option to “annuitize” them (accept an ongoing series of payments that adjusts according to the value of the fund). If you don’t choose to do that, you can just sell your shares and it doesn’t really differ particularly from how you would handle a mutual fund.
I would say about 75% of my investment portfolio is held within their annuity choices and about 25% within their mutual funds. Many people don’t even really realize that they’re buying annuities with TIAA-CREF because the variable annuities behave so similarly to mutual funds.
TIAA-CREF has consultants (i.e. sales people) that can explain it to you. They don’t call them sales people, but they are adamant that they can’t give you investment guidance so they aren’t really counselors. In my experience they can explain (to my satisfaction) how the investment choices work. I asked specifically the annuity/mutual fund question the last time I met with one.
July 10th, 2007 at 11:37 am
TIAA-CREF is known for having some of the lowest costs/fees. So they are good place to keep your money long term. The investment choices are pretty limited, but offer something for everybody. I feel pretty secure with them, knowing that practically all teachers and universities, along with with health-care workers have TIAA-CREF for their retirement too. If only Social Security funds were handled the way TIAA-CREF handles these assets, it would be in such a good place today.
Maybe they should take over Social Security?
July 10th, 2007 at 6:52 pm
My father’s other investment choices are CREF mutual funds, and I’ve found them overall to be okay, covering the major asset classes without adding too many random vague funds, and the funds have limited turnover and expense ratios around 0.50%.
July 10th, 2007 at 6:58 pm
From what I’ve read elsewhere, TIAA-CREF’s fees have actually been going up slightly, which people have theorized is the influence of their newish CEO Herb Allison, formerly of Merrill Lynch.
I also use TIAA-CREF for my 403(b), and I’ve found them satisfactory (I don’t invest in the Traditionally Annuity, however). I have also noticed that their online system leaves much to be desired. I read it is partly because they attempted to make massive changes in their systems a few years ago. Some of their data is still on the old system, which can cause some items in your online account to not match up exactly, although it usually gets fixed eventually.
July 10th, 2007 at 8:45 pm
Jonathan, I am very happy to see you talking about TIAA-CREF as well as others talking about their own experience with TIAA-CREF. Just wonder why no one pays attention on TIAA real estate fund. I have TIAA-CREF 403b acc over 13 years and only recently looked at this fund. It started on Oct. 1995 and the avg return is 9.4% since inception. The beauty is that from day one, no single month losses money. The way that achieves such performance is not like stock market going up and down but rather consistently gain more or less 1% per month year after year. I started watch this fund daily this year and found it has very weak or no correlation with the stock market. So far YTD return is 7.87% and is on track to gain 12-14% at end of the year. However, this fund is not open to everyone but only to qualified people. Hope more people are interested in this fund and bring more detailed analysis. Jonathan, hope you do more though analysis to see if it is suitable to your dad. By the way, I think TIAA-CREF lost it non-profit status some years ago but not sure. The reason I like TIAA-CREF is that the business is not a greedy business and people who has acc are not greedy people either. Just hope the new CEO does not bring Merrill Lynch?s bad business model here.
July 11th, 2007 at 5:19 am
I actually came back to comment again because I had forgotten to mention their real estate fund (which is actually one of the annuity choices I believe). It really is unique as far as I have seen and I have been glad to have it in my asset allocation.
July 11th, 2007 at 8:20 am
TIAA CREF has been the investment vehicle for teacher and educator pensions for many years. It is organized as non-profit driven enterprise. Notice their website is tiaacref.ORG For many years they had most of the market for educator pensions, but in recent years they have been losing business to other firms like fidelity. It used to be you could only invest in their products if you were an educator investing through work, but several years ago the offered their products to the public. I was attracted to them because of their history and their low fees. But that has changed with their new CEO. Recent they have withdrawn from the public mutual fund market. They have taken their public mutual funds and combined theim with their institutional fund and they have added a 12b-1 fee to the mutual fund that I own. TIAA CREF claims they were losing money. I’m not very happy with this change.
July 11th, 2007 at 12:11 pm
The product is great - CS sucks big time.
In many areas CS is open till 5pm.
One department does not talk to another.
Takes 4 weeks to cash a contribution check/etc/etc…
Don’t use them if you are easily irriated - otherwise you will drive yourself mad
July 12th, 2007 at 12:20 pm
My husbands retirement was/is with tiaa. He passed away in Dec and I am in the process of getting it switched over to me. We are going on 7 months getting this taken care of. He had a very good return on his money but like Don said lots of problems especially in their tax dept. I am waiting for my 3rd 1099 to be sent because the first 2 were incorrect. No one seems to be able to give me correct information on the taxes I’m resposible for (out standing loans) and what I’m not resposible for. It is so fustrating. I have found many small mistakes in paper work etc. I have not been able to view his acct since February because it needs to be frozen in order to move the money over to a savings and investment. I am considering moving my money away from them and into an acct with someone else because of how inept they are.
August 28th, 2007 at 7:49 pm
As a University employee, I also had TIAA-CREF for my 403b for a few years. Performance was acceptable, and as already noted, the Real Estate fund seemed to be a unique winner. Unfortunately, online service was horrible — interfacing TIAA-CREF with Quicken was nightmarish. I also stumbled upon a university study (can’t seem to find the link now) citing relatively poor long-term performance of TIAA-CREF’s offerings compared to the broader offerings of vendors such as Fidelity and Vanguard. Having other accounts at Fidelity, my switch seemed to be a no-brainer. I’ve been happy overall (except with my Fidelity Real Estate Investment fund, which has tanked since my sinking money into it!), online access is great (but Quicken still has trouble dealing with the fact that both my wife and I have 403b accounts with Fidelity), particularly with Fidelity’s recent introduction of the MySmartCash checking account that further simplifies my life.
August 30th, 2007 at 10:58 am
Nice thread on TIAA. Thanks for all of the viewpoints.
One thing to keep in mind though is that when you are in your withdrawal portion of the annuity, the gains are taxed at your MARGINAL rate (like regular income) vs the more advantageous capital gains rate. Also, if all of your contributions were in pre-tax dollars, ALL of the annuity will be taxed. Keep in mind that this then locks you in at a minimum tax level then for the rest of your life since your income is now fixed (not saying this is bad, but just realize that).
If you have the discipline, it is better to put the accummulation phase money in regular mutual funds or ETFs then buy an immediate annuity when you want to start the income stream. That way, your gain gets taxed at the lower rates for as long as possible. Yes, that would mean some near term capital distributions, but you are paying this while you still have a job vs when you are trying to live off the most you can with what you have.
Of course, if you get matching dollars by the company, that would have advantages, but I don’t think you’d necessarily want to maximize beyond the match if you really want to optimize your dollar’s performance…
April 19th, 2008 at 11:37 am
It is nice to see that you are investigating your Dad’s retirement
choices. I have been trying to understand the TIAA Traditional
Annuity and have two specific questions which TIAA have refused to answer. One is what the expense ratio actually is. They argue
this cannot be defined because it is an “insurance product”. One can find on the web from the state universities of illinois that the ratio is 0.45% and from the state universities of connecticut that it is 0.25%. Quite a difference. TIAA will not admit to any number. My second question would be what is the long term (say since 1950) performance of this product. This ought to be public knowledge but TIAA refuses to say. Has your father kept good records? If so he may have the answer. I suspect that this actually is a good product but it is quite bizarre that one cannot find out basic information about it.
October 5th, 2008 at 1:45 pm
It is tempting to think of the TIAA Traditional account as a kind of bond fund, and, even though it holds bonds, it is quite unlike a bond mutual fund. It is an “insurance product” and any money you put there is trapped for 10 years; you cannot simply move money out of TIAA Traditional. So, how do they determine your “yield” — well, they have a committee that “decides.” This is not like the yield on a bond fund, where you get the interest payments on the bonds it holds. At TIAA they may decide to give you a little less this year, just so in case next year’s returns are bad they will have a little “cushion.” In other words, their grandfathered exemptions to all sorts of consumer protections makes them one OPAQUE asset. You can trust, but you can’t verify.
October 12th, 2008 at 12:03 pm
Most of my retirement is in TIAA traditional. In these tumultuous financial times, I wonder about the safety of TIAA in meeting its obligations. I’m a year away from retirement. Granted that they have a great record and the highest ratings. But what does that really mean when they have invested in bonds of all sorts, commercial mortgages, and real estate. It is impossible to get any answer from TIAA except for their usual guarantee of a minimum 3% annual growth. I’d be interested in any insights any one might have and so would a lot of other people I know.
Tom
November 1st, 2008 at 7:26 pm
I am 44 and don’t have the temperament to watch my money drop 70% in value in the stock market. I am now in a money market acct at Tiaa and am really attracted to the guaranteed principal from the TIAA Traditional. Because they have that ten year payout requirement I’m leary about investing b/c it is basically a one way street. I would like to hear your thoughts about whether it is too conservative to take the Traditional Approach for my entire Tiaa account. I like the stability but am I too risk averse for my own good? (Also given the very grim economic indicators, I’m expecting a very very long bear market).
December 19th, 2008 at 4:41 pm
Hi,All,
I am at the place where I need to begin payout from my TIAA-CREF accounts. A retirement specialist mentioned the lifetime monthly payments from my annuity, maximized if I surrender the policy to TIAA-CREF with no beneficiary payouts.
While this is attractive given that I have no beneficiary concerns, I wonder the degree to which the monthly payout for life will vary from the amount given by the TIAA-CREF online calculator. The retirement specialist said that the monthly amount would vary slightly (up as well as down) but did not give a range of fluctuation.
Has anyone taken this option and if so, are you pleased with the outcome? The option has engendered for me a slight feeling of Marlowe’s Faustus and Mephastophilis.
Thanks so much for your replies.
February 4th, 2009 at 1:35 pm
Hi All,
I have heard that Bowdoin College in Brunswick Maine recently decided to stop using TIAA-CREF for their retirement plans for their employees and was switching to Fidelity. The reason seemed to be recordkeeping issues and other unspecified issues. Does anyone know anything about this?
Has anyone gotten any more concrete information about the security of the guarantee of the Traditional annuity I am still puzzled.
thanks,
Jenny
March 5th, 2009 at 10:38 am
I’m confused to see my TIAA Traditional Account drop over $4,000 in value from last quarter (even as I’m still adding to the account). Is that all interest earned that they are stripping away?
March 7th, 2009 at 11:30 am
It is interesting to read all the comments back to 2007 particularly the ones that stock mutual funds offered higher rates of return over TIAA traditional. i wonder what these folks would think now after the 2008 -38% decline of the S&P500 and 2009 -20% returns. Proves that you should have a diversified portfolio and don’t believe the buy and hold Kool aide.
As for for Tom’s question of Oct 12,2008 about safety, nothing in live is without risk. We have seen that money market funds can even decrease recently and what’s to prevent the government not honoring FDIC insurance if the federal government keeps going into debt and goes bankrupt like Iceland, Latvia. TIAA says it doesn’t have subprime debt in the Traditional annuity which is one good thing and hopefully no credit default swaps.
Interested in any other comments.
March 13th, 2009 at 1:59 pm
Google around a bit and you will find web pages galore about the disaster that TIAA-Cref has become. Every transaction when you want to get your money out is a nightmare. ANd the returns are not any better than elsewhere. Low expenses seem to mean low ability as well. The annuity payout is simply not as good as others. They are a fraud.
March 13th, 2009 at 6:08 pm
I think Bob makes a good point. TIAA-CREF advertises in multiple venues, Vanguard does not. The CREF stock portfolio has a 60 bp expense ration, almost ten times the expense ratio of Vanguard SP500 fund. The TIAA traditional fund is NOT a bond fund or a fixed income investment. It is an INSURANCE CONTRACT. It does offer a “guaranteed” return of 3%, but you can not withdraw (or move) more than 10% of your money in one year. Still, the worst thing is that they make such information very hard to get — DO YOU KNOW WHAT THE EXPENSE RATIO OF TIAA TRADITIONAL IS? If you do, you are a grandmaster. I am eager to learn the number.
April 20th, 2009 at 11:49 pm
The correct comparison for the Vangard SP500 fnd is not the CREF stock portfolio, which has a significant foreign component and attempts to beat the SP500, but the CREF Equity Index portfolio which would be the equivalent of the Vanguard total stock market index fund. Their expenses are fairly similar.
November 5th, 2009 at 2:49 pm
Keep in mind when you take distributions once that distribution period is over (your life, spouses life or period certain) any money left in the account is not paid out. This means if you have a 100K in your annuity and take a single life payment when you retire. Then get hit by a bus the next day 100K that you could have left to a beneficiary, non-profit, alumni group etc is gone.
I recommend taking the lump sum and rolling it over to an IRA. Use a Financial Advisor or manage it yourself, but the investment and payment options will be much better.
Another thing to remember is that TIAA will make you wait 10 years to get your money out, so start early…..