TIAA-CREF, the retirement plan of many university professors and administrators as well as others, has escaped much of the increasing criticism of 401(k)-type plans. A number of academics with TIAA-CREF are even unaware that it is a 401(k)-type plan, thinking that the growing criticisms of 401(k)s don’t apply to their situation.
TIAA-CREF has enjoyed relative immunity from criticism for two reasons. It is a nonprofit company that is presumed to operate exclusively in the best interests of its participants because it does not have shareholders. And precisely because it is the plan of so many highly-educated professors, it is presumed to be good because surely they must know what they are doing.
Yet TIAA-CREF participants fare no better in retirement income than 401(k)-type plan participants with other financial services industry companies such as ING, Vanguard, and Valic. That in turn means that they fare much worse than employees with traditional defined benefit pension plans.
I found out this out from thirty-five years personal experience as a participant in TIAA-CREF, a lot of research, and initiating a successful reform campaign to get out of it and into a defined benefit pension plan—all of which is recounted in Social Insecurity: 401(k)s and the Retirement Crisis.
I also found out after counseling hundreds of professors and administrators about their retirement plans that very few of them had more than a superficial understanding about how the plans worked or realistic estimations of what to expect in terms of retirement income.
With $472 billion in retirement savings under its control, TIAA-CREF in the fourth largest manager of 401(k)-type plan assets in the United States, following Vanguard, Fidelity, and BlackRock. It is indeed a nonprofit company. But that doesn’t stop it from following many of the practices of for profit companies.
Like other companies, it charges third party administrator fees to manage investments, fees that come out of the account balances of its participants. This is a major problem for all participants in 401(k)–type plans. Management fees, commissions and other costs drain off minimally a quarter of investment gains.
As a competitive company, it advertises heavily to convince participants to contribute more, maintain its hold over existing accounts, and secure new business. The costs of the advertising come out of the accounts of participants which diminish more their eventual retirement incomes.
Among the places where it prominently advertises is in the publications of the American Association of University Professors, the organization that represents a large percentage of its participants. AAUP, not surprisingly, does not take a critical stance toward TIAA-CREF, seeming to treat is as a fixture of university life as normal as the English Department.
TIAA-CREF’s top managers and trustees have joined the general corporate trend of increasing their already high pay packages, which diminishes more assets to provide retirement incomes. In 2012 CEO Roger W. Ferguson, Jr. received $12.5 million. Four other top managers received over $2 million. Its 14 Board of Trustees members, which include prominent academics, received an average $270,000.
Like other financial services giants, TIAA-CREF defends the high compensation of its top managers and trustees as being necessary “to attract, retain, motivate and reward employees who possess the knowledge and experience we need to conduct our business.” In other words, because other financial services companies pay mega-salaries to top executives, TIAA-CREF has to as well, in order to get the people it wants. So much for it representing an alternative philosophy.
Annuities are a key part of the 401(k) approach to retirement. They are supposed to mimic traditional pensions in that they provide incomes for the life of the retiree. As a nonprofit company, one would assume that TIAA-CREF could offer annuities to its members on better terms than those offered by for profit companies.
I put this assumption to the test by requesting by phone from TIAA-CREF what $100,000 would yield in lifetime monthly income for an age 70 retiree. The answer was from $642 to $666. I then compared that to three online commercial quotes. They were from $625 to $651, or virtually the same.
I then compared those annuities with what was available on a truly nonprofit basis. The defined benefit Teachers’ Retirement System, operated by the state of Connecticut, sells annuities to its members. A $100,000 annuity for a 70 year old would yield $793 in lifetime monthly income, significantly more than the TIAA-CREF annuity. Because the Teachers Retirement System does not have the overhead costs of advertising, high executive compensations, and other expenses that TIAA-CREF has, it can charge its members significantly lower costs for annuities.
The main problem with TIAA-CREF and other financial services industry companies that manage 401(k)-type plans, though, is not their excesses. It is rather that the approach they employ relies upon individual stock investing to finance retirement. Over the last 35 years, since it was massively adopted in the United States, this approach has proven to provide significantly less income than the traditional pensions that it replaced. Even if the excesses were reduced or eliminated, 401(k)-type plans would still be vastly inferior to traditional pension plans.
If TIAA-CREF participants want a true alternative to the 401(k)-type plan they have, they will have to demand the right to create or transfer to an existing defined benefit traditional pension plan.
Read more about the retirement crisis on the Beacon Broadside:
James W. Russell is the author of Social Insecurity: 401(k)s and the Retirement Crisis. An authority on retirement policy in the United States, Europe, and Latin America, he led one of the first employee movements to successfully challenge the dominant trend and replace a 401(k)-like plan with a more secure traditional pension plan. He has taught at universities in the United States and as a Fulbright professor in Mexico and the Czech Republic. He lives in Storrs, Connecticut.