Bogleheads

[crefwatch]

Just one more post on TIAA Traditional restrictions: I hate to sound like I work for TIAA-CREF, because I make plenty of complaints at every (July) Annual CREF Meeting. But I pulled together a few rates for May 30, 2008. When you look them over, I find it hard to argue that TIAA is being unfair by having withdrawal restrictions on TIAA Traditional RA/GRA accounts.

Some Figures from May 30, 2008
Money Mkts:7 day Annualized Yield, Bond Funds: 30-day Annualized Yield
AATR = Average Annual Total Return (not just Yield.)

Vanguard Prime Money Mkt Fund: 2.25% (5-year AATR 3.18%)
CREF Money Market Account: 1.80% (5-year AATR 3.00%)
TIAA Traditional RA/GRA 5.75% (5-year AATR 4.75%)
TIAA Traditional IRA etc. 5.00% (5-year AATR 3.81%)
Mass Mutual Stable Return II 1-yr Actual: 3.84%% (5-year AATR 3.83%)
WSJ 2-year $2-$5 Million GIC Index: 4.13%
WSJ 5-yr CD Rate Average: 3.65% Annual Yield
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Funds Below Do Not Have "Stable" Values:

Vanguard Short-Term Invest-Gr Bond: 4.33% (5-year AATR 3.49%)
Vanguard Long-Term Invest-Gr Bond: 6.10% (5-year AATR 2.85%)
CREF Bond Market: 4.57% (5-yr AATR 3.88%)

Here's a related quote from a book I recently picked up for a song on Alibris (I consider this book somewhat out of date, but the quote remains accurate):

Understanding TIAA-CREF: How to Plan for a Secure and Comfortable
Retirement
by Irving S. Schloss, Deborah V. Abildsoe
Hardcover: 272 pages
Oxford University Press, USA, 2000
ISBN-10: 0195131975
ISBN-13: 978-0195131970

[Bottom of page 25] ...

"As more long-term investments are booked, the company loses liquidity. It needs to put its cash to work. As a long-term lender, it needs protection against the participants' becoming short-term depositors. Effectively this equates to preventing a run on the bank. If a sufficiently large number of participants decided to take their funds out of the fixed annuity pool and move them to another investment, say, CREF, then the company would have to liquidate its long-term investments. Such long-term debt is typically not traded on an active exchange or secondary market. If enough participants decide to move their funds, the company will have to conduct a fire sale of its investment portfolio, and it will not have enough assets to be able to honor contracts already signed. A provider of fixed annuities must either place limitations on the movement of funds or penalize its insureds heavily for any early withdrawals.

"TIAA invests in publicly traded bonds and makes direct loans to corporate borrowers. It may also invest in real estate or commercial mortgages. These investments represent long-term commitments. They lack the liquidity of, for example, Treasury bonds. The theory behind TIAA's investment pattern lies in its ability to lock in better rates of return. In general, the less liquid an investment, the higher the return the investor can demand of the issuer. The lack of liquidity restricts the flexibility of the investor, in this case TIAA, to move in and out of the portfolio as the size of the premium pool grows or shrinks. As a result, with two limited exceptions described where applicable, TIAA imposes a ten-year limitation upon the movement of funds, and, as described in more detail later, the funds exiting TIAA are paid ratably, that is in roughly equal installments, over the ten-year period. "

Tim