question about TIAA CREF traditional annuity

[namaste]

Me and my husband are in our late 30s and he has through TIAA CREF Traditional Annuity through his employer been investing 50% of his retirement into a guaranteed minimum of 3%. We don't know what the fees are and I asked him to find out.

I am uncomfortable with this but I am not sure how to convince him. It took a lot for me to convince him to look into what the fees are.

Thanks so much.

[livesoft]

I love this fund. I own it. It is like a stable value fund. It may be hard to figure out what the fees are, but you should compare it to other guaranteed annuities with a 3%-floor. You are kinda asking "What are the fees on a CD?" which most folks do not do since all they are interested in is the yield or interest rate that the CD pays.

I do not know whether you wish to have 50% of retirement assets in this fund or not, but I can think of lots worse places to put your money.

http://www.tiaa-cref.org/public/product ... index.html is a starting point for questions on this fund.

[namaste]

I would like to add that I am a fan of buy and hold strategy. Would we use this in place of bonds as a way to stabilize in our buy and hold strategy? Or would we do this in addition to a buy and hold strategy.

[tibbitts]

I would like to add that I am a fan of buy and hold strategy. Would we use this in place of bonds as a way to stabilize in our buy and hold strategy? Or would we do this in addition to a buy and hold strategy.

Buy and hold isn't related to TIAA Traditional, except to the extent that if this is a retirement annuity, withdrawals are restricted; your money is locked into the fund for 9+ years (only partial withdrawals are allowed.) There should be no fees - you get whatever rate TIAA declares, which is subject to change but never less than 3%.

Paul

[atomicrc11]

I also agree that this is a good fund. The expenses really are irrelevant as they are making a guarantee to pay you the listed interest rate. Essentially think of it as purchasing future income with today's dollar. TIAA is a very conservative company and are one of the best rated life insurance companies out there. If you have an annuity, this really is the one to have.

[raywax]

I would like to add that I am a fan of buy and hold strategy. Would we use this in place of bonds as a way to stabilize in our buy and hold strategy? Or would we do this in addition to a buy and hold strategy.

If you were to read the TIAA-CREF forum at Morningstar you would find that many there use the Traditional Account as their "bond" fund. The guarantee of 3% minimum return is considered to be a more than fair exchange for the higher returns that a bond fund might return in a period of declining interest rates. In addition, historically it has been a decent hedge against inflation.

Ray

[namaste]

Thanks so much for the information. I guess it depends if the bonds are there for stabilization versus income. I posted all my full information. I really need help deciding how much we should allocate towards the Traditional Annuity when we're going for 60% stock/40% bond.

[namaste]

If you were to read the TIAA-CREF forum at Morningstar

Thanks so much. How would I find this? I'm registering now.

Thanks again,
Jennie

[dmcmahon]

Can anyone call TIAA-CREF up and invest in this? I've been looking for an inflation-tracking annuity vechicle for my savings, without success, for years.

[raywax]

If you were to read the TIAA-CREF forum at Morningstar

Thanks so much. How would I find this? I'm registering now.

Thanks again,
Jennie

If you do not have a Premium membership in M* I think you can pay $5 to register and that will give you access to the Discussions. As I have the Premium membership I can't be sure of this nor can I tell you how to set it up. But go to www.morningstar.com and look for the Discuss (or discussion) groups (or tab). Or once you are there look for their Contact page and send see if you can phone or e-mail them for information on how to get access to the discussions.

Ray

[namaste]

Can anyone call TIAA-CREF up and invest in this? I've been looking for an inflation-tracking annuity vechicle for my savings, without success, for years.

According to their website, you can only use them if you belong already or you have a spouse or partner who belongs.

[Levett]

Eligibility is a bit more permissive than has been indicated.

Here's the language re IRAs:

Am I eligible to open an Investment Solutions IRA?
You are eligible to open an Investment Solutions IRA if you meet one or more of the following requirements:

You’re currently an employee or trustee of an institution eligible for TIAA-CREF retirement plans including all nonprofit institutions and government entities organized in the United States.
You’re over 55, retired, and have worked for an eligible institution for at least 5 years.
You have an existing TIAA-CREF Retirement, Group Retirement, or Supplemental Retirement Annuity, Keogh, Teachers Personal Annuity or a TIAA Life Insurance policy.
You’re the spouse or domestic partner of someone described in 1, 2, or 3 above. You’re also eligible if you received funds through a Qualified Domestic Order (QDRO).
If you’re rolling over an account from an eligible institution that is currently held with another investment company, you can open a new IRA to receive the funds. This can include annual contributions made to a Traditional IRA. Remember, a spouse or former spouse is not eligible to open an IRA until the participant has established an IRA with TIAA-CREF.

It should be note that TIAA Traditional comes in multiple versions:

TIAA Traditional Annuity
Current
Rates 6 Rates of Return ending 02/28/2010 7
1 Year 3 Year 5 Year 10 Year Since
Inception 8
TIAA Traditional Annuity
Retirement Annuity and Group Retirement Annuity 4.00% 4.00% 4.92% 4.56% 6.57% --
Supplemental Retirement Annuity and Group Supplemental Retirement Annuity 3.00% 3.00% 4.17% 3.60% 5.99% --
IRAs and Keoghs 3.00% 3.00% 4.17% 3.60% 5.99% --
Retirement Choice 4.00% 4.00% 4.92% -- -- 4.55%
Retirement Choice Plus 3.00% 3.00% 4.17% -- -- 4.36%


Bob U.

[atomicrc11]

The restrictions for opening IRA's with TIAA-CREF is in relation to the Investment Solutions IRA. Anyone can open a Mutual Fund IRA, but you may not have access to the TIAA traditional product and are subject to fund minimums. There are no fund minimums when investing in an Investment Solutions IRA.

[nomad]

I can't say I have a good idea of what the fees are, but the fact that it's a non-profit org at least makes it believable that they could have the very low fees that their sales reps claim to have. I like the fact that there is no transfer-out fee, so you're free to leave them at no cost.

Banks are good enough at hiding fees that it would seem to require a pro working full time to get the real figures.

Consumer Reports isn't much help in sorting it out. I expected them to have some kind of rating on the fees, but they only reviewed customer service, account service, website..

[Levett]

The last information I've seen on the fee for TIAA Traditional (ER 0.45) appears here.

http://www.surs.com/pdfs/SMP/funds/T-TrAn.pdf

The evaluation was done for the State Universities Retirement System of Illinois. Bob U.

[namaste]

Thanks so much. I'm still trying to think of what the difference is between this and inflation linked bonds in terms of long term outcome. It appears the only differences are: 1. guaranteed 3% interest, and 2. Different scheduled payout.

It definitely seems it could go in the bond category since it's guaranteed as a sort of way to stabilize the portfolio.


The key question I now have now is wether to continue to invest in this annuity and TIPS in a 50/50 split versus all TIPS for that section of my portfolio. (my portfolio is listed in my other post)

Thanks so much for any other input.

[Levett]

I don't have an informed view about the 50/50 split, but you're right to imply that adding TIPS to TIAA Traditional, which does not hold TIPS, makes good sense. Bob U.

[raywax]

[quote="namaste"]Thanks so much. I'm still trying to think of what the difference is between this and inflation linked bonds in terms of long term outcome. It appears the only differences are: 1. guaranteed 3% interest, and 2. Different scheduled payout.

There is no "scheduled payout" rate in the sense I think you mean the phrase. Technically the phrase "payout rate" with respect to the Traditional Account refers to the interest rate paid when the account (or part of the account) is annuitized and this is tied to the vintages and interest rates associated with each vintage at a specified date. It gets a bit complex and this is not a good forum for discussion of "payout rates."

I think you have in mind the rate the Traditional Account EARNS rather then the annuitized "payout rate." That has no schedule in the sense of any sort of fixed rate of change over time. In the sense that any fixed income account pays interest one can speak of a "schedule" of interest the account earns.

Assuming you are talking about the latter, the rate the Traditional Account earns over time that is set by TIAA and it can change as frequently as monthly though there are periods when it has not change for a year or more. TIAA itslef makes a claim, in one of its published documents on (at least it use to be on) their web site showing (at the time) that it returned ("earned" for investors in the account) a return somewhat above the rate returned by the 10-year Treasury Bond. Right now it pays (depending on the account in which it is held) between 3.0 and 4.0 percent.

Historically, going back as far as 1969 when I first participated in it, the Traditional Account has been a moderately good hedge against inflation. I have records of earning an annual rate of 11% and I think it may have paid a bit more than that.

But you are right in that a major advantage of the Traditional Account is the guarantee provided by TIAA. Unlike a bond account, when interest rates rise the principal declines, the amount invested in the Traditional Account always increases. The guarantee is by TIAA which I believe may still be the only insurance firm with the highest rating (could be wrong on this) from all four major insurance rating firms. There is no question that TIAA is a very conservatively manged insurance firm.

Ray

[namaste]

But you are right in that a major advantage of the Traditional Account is the guarantee provided by TIAA. Unlike a bond account, when interest rates rise the principal declines, the amount invested in the Traditional Account always increases.

Could the argument then be made that the TIAA Traditional Annuity with guaranteed 3% interest + guarantee preservation of capital would be more sure to preserve capital than any bond fund and be as good a hedge against inflation?

Would the downsides be that you have less flexibility in terms of how you can take the money out and a risk of lower return than a TIPS bond fund could return?

Are there any other pros and cons to this TIAA Traditional Annuity as it compares to TIPS?

[raywax]

Could the argument then be made that the TIAA Traditional Annuity with guaranteed 3% interest + guarantee preservation of capital would be more sure to preserve capital than any bond fund and be as good a hedge against inflation?

I am not that familiar with bond funds and I certainly would not make the claim you are asking about. However, in general terms I would say that the guarantee makes it a better preserve of capital than almost any bond fund (hedging because of my lack of knowledge of bond funds).

Would it be as a good against inflation? That depends on the bond fund you are comparing it to. If you compared it to a short-term Treasury fund or to a Inflation Linked Bond (TIPS) fund I would say no. As to other bond funds all I can do is repeat what I experienced; when inflation was very high in the late 70s and early 80s it paid at least 11%.


Would the downsides be that you have less flexibility in terms of how you can take the money out and a risk of lower return than a TIPS bond fund could return?

The answer to this depends on what account the Traditional Account is held in. In a RA (don't really know that much about GRA but I think the answer would be the same) I would say definitely Yes you have much less flexibility in that the ONLY way you can move funds out of the Traditional Account while in the accumulation account is via a TPA which pays out the principal and interest in 10 annual distributions that use to be said to be "approximately equal" (this year's was not) over a period of nine years and one day.

From a GSRA or IRA you can move any or all of the money out at any time; there is no restriction. And you could move it back in later if you cared to do so. The catch is that the interest rate earned in these two accounts is less than in an RA. Currently in these two accounts it is earning 3.0% while in an RA and GRA it is earning 4%.


Are there any other pros and cons to this TIAA Traditional Annuity as it compares to TIPS?

Yes as I said it will not provide as good inflation protection as a TIPS will. Now as to the "quality" of the investment I will leave it to you to decide if TIAA is of lesser or greater quality than U.S. Treasuries!

Ray

[Levett]

Here's an informative link that shows, among other things, how TIAA Traditional (the RA/GRA version) has performed over a lengthy period of time.

Look at Exhibit 1.

http://www.tiaa-cref.org/ucm/groups/content/@ap_ucm_p_tcp/documents/document/tiaa01011136.pdf

Past peformance, however, is no guarantee......

Bob U.

P.S. When you say "TIPS," do you mean TIPS held directly or a TIPS fund?

[avalpert]

Thanks so much. I'm still trying to think of what the difference is between this and inflation linked bonds in terms of long term outcome. It appears the only differences are: 1. guaranteed 3% interest, and 2. Different scheduled payout.

It definitely seems it could go in the bond category since it's guaranteed as a sort of way to stabilize the portfolio.


The key question I now have now is wether to continue to invest in this annuity and TIPS in a 50/50 split versus all TIPS for that section of my portfolio. (my portfolio is listed in my other post)

Thanks so much for any other input.

I usee TIAA traditional as part of my nominal allocation in a 50/50 tips/nominal split (my TIAA resources in my wife's 403b aren't enough for it to be the complete allocation). While it is of course not interchagneable with treasury bonds or a treasury fund I think it is good enough for asset allocation work and it provides the desried effect for my portfolio - a steady income stream fairly uncorrelated to stocks with very safe preservation of capital.

[raywax]

[quote="bob u."]Here's an informative link that shows, among other things, how TIAA Traditional (the RA/GRA version) has performed over a lengthy period of time.

Look at Exhibit 1.

http://www.tiaa-cref.org/ucm/groups/content/@ap_ucm_p_tcp/documents/document/tiaa01011136.pdf

Past peformance, however, is no guarantee......

Bob U.

Bob's link is the publication to which I was referring. If you look at the graph (Exhibit 1) you will not that it shows a maximum return in the time period portrayed of 13%, higher than the 11% I mentioned.

Ray

[tibbitts]

I have a relatively large allocation to TIAA fixed, although there are risks different than bond funds. You have the 9+yr lock-in, and the fact that inflation could rise to 20% and TIAA could still credit your accumulation at 3%. Plus the fact that my non-scientific observation seems to show that Traditional has become less of an inflation hedge over time, possibly partly due to rising expenses. And I have no clue why really old (10+yr) accumulations are being credited at 3.75%, when it would seem intuitive that they should at least be earning the 4% that current accumulations earn.

Paul

[namaste]

I've been searching the forums and learned something about vintages, which may explain your problem of lower payment on older investments within the annuity.

I really thank you all for your input.

I guess part of it is do we trust TIAA will still be here versus the government is one big factor.

Another factor is how stable or unstable bonds can be in preserving income,
and would we gain more money in a bond fund.

As you can see, I'm still totally on the fence.

Are there any other pros and cons that haven't been mentioned yet?

[tibbitts]

I've been searching the forums and learned something about vintages, which may explain your problem of lower payment on older investments within the annuity.

I really thank you all for your input.

I guess part of it is do we trust TIAA will still be here versus the government is one big factor.

Another factor is how stable or unstable bonds can be in preserving income,
and would we gain more money in a bond fund.

As you can see, I'm still totally on the fence.

Are there any other pros and cons that haven't been mentioned yet?

Vintages are just the description for contributions made at different times earning different rates. My concern is that the rate is somewhat arbitrary, and that the future may not be like the past with regard to performance relative to inflation. But I still hold the fund, partly because there don't seem to be any attractive alternatives.

Paul

[namaste]

I think we're just going to hold what we have in the fund, but not contribute more for now, and consider it separate from the rest of our retirement plan, as in, another form of investment much like the small pension I'm vested in from a previous employer and also the very small pension I'm vested in from previous state employment. I'm just not going to consider it part of our plan for right now and just use it as bonus.

Thanks so much for all the information.

[gl]

IMO, equating your T-C Trad. investments to a pension from a company on very solid financial footing is a useful comparison. Also, I think there is something to be gained by adding bonds to your "fixed" income portion of your asset allocation. I particularly like inflation-linked bonds if you are investing a substantial portion of your savings in stocks.

Besides our stock allocation, we contribute to T-C Trad'l, inflation-linked bonds, and the T-C directly-owned real estate account. We contribute to the T-C Trad. account to provide a solid "floor" for some portion of our retirement savings. IMO, the inflation-linked account provides additional support for the floor (e.g., inflation hedge, negative correlation with stocks), but with more risk. The real estate account is arguably more controversial-- especially in these times-- but is a unique way to use real estate for diversification purposes.

gl