Here's why TIAA can no longer play by its own rules

The Securities and Exchange Commission and the New York Attorney General a couple of weeks ago gave a whooping to a broker-dealer subsidiary of Teachers Insurance and Annuity Association of America, better known as TIAA, and penalized the firm $97 million for having its financial advisers push clients making rollovers of retirement funds into more expensive products.

TIAA's financial advisers worked with clients this way from 2012 to March 2018, according to the settlement. To goose sales of the product, known as Portfolio Advisor, TIAA went on a hiring binge, going from fewer than 300 sales reps in 2011 to nearly 900 in 2017.

The New York Times first brought the various conflicts of interest to light in October 2017, citing a lawsuit by TIAA employees and a whistleblower complaint, when it reported that the company was rewarding advisers with bonuses when they steer customers into more expensive products.

"Beginning in or about 2012, TIAA Services and its salespeople used a false and misleading marketing pitch to convince investors to roll over assets from low-fee employer sponsored retirement plans to individual managed accounts in TIAA Services’ Portfolio Advisor program, on which TIAA Services charged lucrative management fees," according to New York Attorney General Letitia James. "TIAA Services trained its salespeople to describe themselves as “objective, non-commissioned” advisers."

Rolling over $500,000 of client assets from an employer-sponsored plan to TIAA's Portfolio Advisor was worth $500 to the financial adviser, according to the regulators. Average two such rollovers each month, and the adviser could earn an extra $12,000 per year, not chump change for such call-center advisers who work at TIAA.

Such conflicts of interest between financial advisers and clients are odious, of course, even more so because they were created in-house and were easily avoidable.

And that's not the only area where TIAA, a massive money manager with more than $1 trillion in assets under management working mostly with professors and college and hospital employees, has liked to play by its own rules.

Some of TIAA's fixed annuities have close to 10-year surrender periods, the longest waiting time for investors to get their hands on their money in the industry, according to financial advisers and industry consultants. Some don't like that and raise the question of how well educated clients and plan participants are about that wait.

The benefit to clients who own those certain TIAA annuities, one in a group called TIAA Traditional, is that they can see annual returns of 3% or higher in a time when interest rates remain near record lows and savings accounts yield little or next to nothing.

The argument TIAA makes to the marketplace to justify waiting a decade rather than five years for clients to get their money is the strategy of the investments made under the annuity contract to generate the returns, several sources said. Illiquid investments generate higher returns, thus the longer surrender periods.

"I think TIAA used to own the higher ed market and could throw their weight around," said Dan Otter, executive director of the nonprofit www.403bwise.org. "But things have changed."

"A 10-year surrender period is an anomaly in ERISA plans, but at least the rate of return was higher than you get in a bond fund so maybe you could make an argument for that portfolio," said Tony Isola, an investment adviser rep with Ritholtz Wealth Management and former schoolteacher. ERISA is the Employee Retirement Income Security Act of 1974.

"I'm not condoning a 10-year surrender, but at least the client or participant is getting a plan," Isola said.

"I think it’s ironic in a way," said Scott Dauenhauer, principal at Meridian Wealth Management, whose clients have about $12 million worth of the TIAA Traditional annuities. "In one respect we have the $97 million settlement with regulators, and what TIAA did was irresponsible and for higher revenues and not in the best interest of clients."

"And then financial advisers hate TIAA because they have a hard time getting the clients' money out of there and they don’t like that," Dauenhauer added.

A spokesperson for TIAA defended the long-term annuities, noting in an email that long-term participation in TIAA Traditional leads to very high retirement income.

"The safety and stability of the TIAA General Account, which backs TIAA Traditional, is supported by the long-horizon payout period of the product," the spokesperson wrote.

“Any money allocated to TIAA Traditional has specific rules for taking monies out," the spokesperson continued. "TIAA Traditional is designed for guaranteed growth and lifetime income and not intended for short-term savings, as we often remind plan participants."

The investment advice industry expected better from TIAA because of its long history in the pension business and its long-term clientele, who work at universities and hospitals. Let's hope it can live up to that heritage in the future.