TIAA-CREF Fund Choices

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mike127
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TIAA-CREF Fund Choices

Post by mike127 » Tue Jul 02, 2013 3:32 pm

Just under a year ago I got some amazing help from folks here (and Duckie in particular) with simplifying my investments and structuring them in a way that's consistent with Boglehead principles. (Thread at http://www.bogleheads.org/forum/viewtop ... &p=1467889.) The short version of my investment plan is that I'm using this AA:

56% US Stock (VTSAX / VTI / FUSVX + FSEVX)
16% Intl Stock (VTIAX)
20% Bond (BND)
8% REIT (VNQ / VGSLX)

I'm happy to report that although I'm not finished I've made a lot of progress in carrying out the advice that this group gave me, and beyond that have learned a huge amount from reading the wisdom shared on this site. One question, though: in the thread I mentioned that my wife has the option of holding her three workplace retirement accounts (403b/457b/employer defined contribution account) at either Fidelity or TIAA-CREF. The plan that we worked out in the thread was to move these accounts from TIAA-CREF to Fidelity, but as it turns out my wife feels a lot more comfortable with TIAA-CREF than Fidelity, so we've decided to leave the accounts there.

So I could use some help selecting which of the fund options at TIAA-CREF make the most sense.

Here are the choices:
Guaranteed
TIAA Traditional (no ticker, no ER)

Equities
CREF Stock (no ticker, 0.49%)
CREF Global Equities (no ticker, 0.53%)
CREF Growth (no ticker, 0.46%)
CREF Equity Index (no ticker, 0.42%)
TIAA-CREF Small-Cap Blend Index Fund - Institutional Class (TISBX, 0.15%)
Vanguard 500 Index Fund - Signal Shares (VIFSX, 0.05%)
TIAA-CREF Mid-Cap Growth Fund - Premier Class (TRGPX, 0.63%)
TIAA-CREF Mid-Cap Value Fund - Premier Class (TRVPX, 0.61%)
TIAA-CREF Small-Cap Equity Fund - Premier Class (TSRPX, 0.63%)
American Funds EuroPacific Growth Fund - R6 (RERGX, 0.50%)
Vanguard Total International Stock Index Fund Signal Class (VTSGX, 0.16%)
American Funds Washington Mutual Investors Fund R6 (RWMGX, 0.31%)

Real Estate
TIAA Real Estate (no ticker, 0.90%)

Fixed Income
CREF Bond Market (no ticker, 0.44%)
CREF Inflation-Linked Bond (no ticker, 0.44%)
Vanguard Total Bond Market Index Fund - Signal Shares (VBTSX, 0.10%)
BlackRock Inflation Protected Bond Portfolio Institutional (BPRIX, 0.45%)

Money Market
CREF Money Market (no ticker, 0.41%)

Multi-Asset
CREF Social Choice
CREF Lifecycle target date funds
Applying the criteria of choosing funds that are low-cost and passive, it looks like these are the "right" choices:
Vanguard 500 Index Fund - Signal Shares (VIFSX, 0.05%)
TIAA-CREF Small-Cap Blend Index Fund - Institutional Class (TISBX, 0.15%)
Vanguard Total International Stock Index Fund Signal Class (VTSGX, 0.16%)
Vanguard Total Bond Market Index Fund - Signal Shares (VBTSX, 0.10%)
When I did a Vanguard financial plan about a year ago, though, here's what they recommended:
CREF Growth (no ticker, 0.46%)
CREF Bond Market (no ticker, 0.44%)
CREF Equity Index (no ticker, 0.42%)
Given all of this, I have three questions:
  • What am I missing that would lead Vanguard to recommend these three CREF active funds over four cheaper passive funds, three of which are Vanguard funds? Do people agree with the fund choices I've outlined above or are Vanguard's choices better? If Vanguard's choices are better, why?
  • If I have to put equities into a retirement account, is there a preference from a tax perspective between using VTSGX and using a VIFSX / TISBX combination (at a 5:1 ratio)?
  • Any other suggestions about TIAA-CREF specifically? I've heard good things about using TIAA Traditional over a bond fund to satisfy a bond AA, and I read what is in the wiki about this product (http://www.bogleheads.org/wiki/TIAA-CRE ... raditional), but don't feel like I really understand this annuity well enough to invest in it or decide whether I like it better than VBTSX.
Thanks so much for your help!

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ResearchMed
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Re: TIAA-CREF Fund Choices

Post by ResearchMed » Tue Jul 02, 2013 4:22 pm

1) Strongly recommend at least something in the Real Estate Fund (not the REIT, which doesn't appear to be a choice within TIAA-CREF in this plan anyway).

We call it "the little fund that could", as it chugs away, not-too-slowly, and reasonably steadily.
(There was a major downturn, along with everything else, during the 2008/2009 follies. However, there was enough "chatter" for us to realize why this fund would be expected to do poorly along with everything else, more poorly than the underlying properties values might have suggested, if lots of investors bailed... forcing sales of those properties in a depressed market. Yes, that was definitely market timing. We didn't get out at the very top, and we waited to see the uptick appear fairly steady so we didn't get back in as soon as we might have. But we felt very comfortable with the savings, and then plowed it all back in plus some. We added more because TIAA-CREF had just instituted the limit on investments in that fund, and within our 403b, we had a one-time chance to put as much in before a deadline. We could always move it out, but we couldn't put more in. We've kept it all there, and it's ended up being our "bond equivalent" again, which worked out very well. We do keep an eye on it, obviously.)

2) Their International index fund seems to be doing much better than Vanguard's, and I'm not sure why. So for the "general international index", we use theirs, and keep some of the Equities index portion at Vanguard. (We also have some other fund families' international non-index funds, and other funds as well.)

As for their Equities funds, the two Equity index funds are reasonably similar, and similar to Vanguards. The CREF Stock fund seems to piggy back a bit, sometimes ahead of the Index, sometimes behind. (This doesn't show on the summary chart as the returns exist at this time.)

The Social Choice fund, as with many in that category, doesn't give the same returns as the less restrictive equity funds, so that is more a choice of your personal preferences rather than strict $$ returns.

They used to have Small Cap Value and Growth, but combined them all a few years ago, so if you are considering tilting to SCV, this wouldn't be the best choice, but it would get you a SC tilt if you wanted to add that.

Their Mid-Cap funds might be worth considering, too.

Most of your decisions will involve whether you want to do any slicing and dicing.
(We obviously do, but others don't, and many here disapprove/etc. Our 403b allows just about any fund family at Vanguard, but no such choices at TIAA-CREF, so we keep the major index fund investments at TIAA-CREF, along with the Real Estate fund, and have some other fund family choices at Vanguard, along with several other Vanguard funds. We don't have the other choices your wife's account allows at TIAA-CREF, so we don't have to make comparisons.)

To some extent, the main choice you need to make is whether to include any of the less broad categories (growth, value, small, medium, etc.), and then compare the offerings between what your wife's plan includes, and what your plans might include, or also any taxable investment money you might have.

3) As for the Traditional Annuity, which of these is available in her plan? What is the guaranteed rate (now and if annuitized, and can she remove the money when she pleases, or must she either remove it in 10 approx. equal annual payments or annuitize it?

And you need to consider what choices are in YOUR accounts, as you can pick and choose "which type of holding goes where", as we did with the International Index funds.

RM

ourbrooks
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Re: TIAA-CREF Fund Choices

Post by ourbrooks » Tue Jul 02, 2013 4:33 pm

One reason to prefer the TIAA Traditional Annuity is because the value of your account never goes down unless you withdraw money; it's a stable value fund and stable value funds can only be offered inside of retirement plans.

How much is VBTSX down this year?

avalpert
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Re: TIAA-CREF Fund Choices

Post by avalpert » Tue Jul 02, 2013 6:01 pm

I second what has been said - consider the Traditional account for at least part of your bond allocation (but be sure you understand the withdraw limits associated with your particular account type) and the TIAA Real Estate Fund in place of your REIT allocation.

I would definitely prefer using TIAA for those unique options over their mutual funds (which is exactly what I do with my wifes 403b though we also have some of the CREF inflation Bond fund and occasionally the CREF Equity Index when that is what is needed for the complete portfolio allocation).

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jjustice
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Re: TIAA-CREF Fund Choices

Post by jjustice » Tue Jul 02, 2013 6:47 pm

Your wife's 403(b) has two different types of funds. The first type consists of annuity accounts: the eight CREF variable annuities in your list, the TIAA Real Estate variable annuity, and the TIAA Traditional guaranteed annuity. The remainder, including all those named TIAA-CREF, are mutual funds. I have invested in the annuity accounts (CREF Stock and TIAA Traditional for 35 years and TIAA Real Estate since it began over 15 years ago) and am now happy to have the opportunity to annuitize whatever portion of these accounts that I choose. To my mind, they are the best possible alternatives to defined benefit pensions. They give you the opportunity to create your own life-time, last-to-die pension. I advise you not to pass up the option to invest in these accounts.

As for the comparison of Traditional with a bond fund, Traditional, in its relatively illiquid RA and GRA versions, is now paying 3.4%. It is guaranteed to pay a minimum of 3%. Its actual rate will rise with rising interest rates while bond funds' share values fall in price. It is an auspicious time to invest in Traditional in preference to a bond fund.

John
Last edited by jjustice on Wed Jul 03, 2013 6:24 pm, edited 1 time in total.

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ResearchMed
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Re: TIAA-CREF Fund Choices

Post by ResearchMed » Tue Jul 02, 2013 7:17 pm

jjustice wrote:Your wife's 403(b) has two different types of funds. The first type consists of annuity accounts: the eight CREF variable annuities in your list, the TIAA Real Estate variable annuity, and the TIAA Traditional guaranteed annuity. The remainder, including all those named TIAA-CREF, are mutual funds. I have invested in the annuity accounts (CREF Stock and TIAA Traditional for 35 years and TIAA Real Estate since it began over 15 years ago) and am now happy to have the opportunity to annuitize whatever portion of these accounts that I choose. To my mind, they are the best possible alternatives to defined benefit pensions. They give you the opportunity to create your own life-time, last-to-die pension. I advise you not to pass up the option to invest in these accounts.

As for the comparison of Traditional with a bond fund, Traditional, in its relatively illiquid RA and GRA versions, is now paying 3.4%. It is guaranteed to pay a minimum of 3%. It's actual rate will rise with rising interest rates while bond funds' share values fall in price. It is an auspicious time to invest in Traditional in preference to a bond fund.

John
Not all of the Traditional annuities are as described, so double check which type you have, and precisely what the rates/guarantees are, and what liquidity restrictions there are, if any.

As for holding the equity/etc. funds as "annuities", also check if you can transfer money into those exact funds at any time.
(Our 403b no longer allows this, but that might only be because Employer narrowed down the offerings to a handful, plus all lifecycle funds. Before that, we could move money between the TIAA-CREF and CREF equity index funds, for example.)

The point is that IF you can do this, you'd be able to put money into the CREF annuity funds later, and still annuitize them - UNLESS the rules change in the future. But that's a risk with any "rules" with retirement plans or fund families.

For example, there is now a limit on the total one may invest initially in the Real Estate Fund, and that wasn't the case until a few years ago.
(That seems to be a TIAA-CREF rule, not something the Employer is imposing on a 403b plan, which IS the case with dramatically narrowing down the choices. But Employer then added a much more open plan at Vanguard as a new set of choices, including a Brokerage option for the first time.)

RM

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Re: TIAA-CREF Fund Choices

Post by raywax » Tue Jul 02, 2013 7:35 pm

For example, there is now a limit on the total one may invest initially in the Real Estate Fund,

There is no Real Estate Fund; there is a variable annuity entitled the TIAA Real Estate Account.

Ray

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ResearchMed
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Re: TIAA-CREF Fund Choices

Post by ResearchMed » Tue Jul 02, 2013 7:38 pm

raywax wrote:For example, there is now a limit on the total one may invest initially in the Real Estate Fund,

There is no Real Estate Fund; there is a variable annuity entitled the TIAA Real Estate Account.

Ray
Sorry I used the wrong terminology. I'm referring to the Real Estate [holding], the one that is NOT the REIT.

RM

The Wizard
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Re: TIAA-CREF Fund Choices

Post by The Wizard » Tue Jul 02, 2013 7:39 pm

Ray is correct as usual.
It's TREA, the TIAA Real Estate Account...
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Garco
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Re: TIAA-CREF Fund Choices

Post by Garco » Tue Jul 02, 2013 8:00 pm

(1) The TIAA Real Estate Account (TREA) is special. I started investing in it in 1995. Definitely made a sharp drop in 2008-9, and revived in early 2010. Many long-term investors (including me) bailed out during that period but it has done very well the last three years. There are no limits to how much you can put into the fund via regular contributions from salary or certain other types of "systematic transfer." But once your investment reaches $150K, there are limits to the methods you can use to make such transfers. I view it as a fine "alternative" to the stock and bond funds that TIAA-CREF offers. It makes up a significant part of my own investment (well in excess of the $150K barrier).

(2) In the international area, I would urge you to give serious consideration of RERGX (American Fund Europacific Growth). Historically it has outperformed the VG Total International (VGSTX), including in recent years, even with its somewhat higher ER of .50. (I own this fund.) I'm less keen on TIAA-CREF's international offerings. I would go with either RERGX or VGSTX before considering the TIAA international funds.

(3) TIAA-CREF Equity Index Fund has essentially the same focus as VG's S&P 500 index. I would go with the VG fund in this case. (I own the VG fund.)

DickBenson
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Re: TIAA-CREF Fund Choices

Post by DickBenson » Tue Jul 02, 2013 8:14 pm

mike127 wrote:I'm using this AA:

56% US Stock (VTSAX / VTI / FUSVX + FSEVX)
16% Intl Stock (VTIAX)
20% Bond (BND)
8% REIT (VNQ / VGSLX)
In the spirit of simplicity, I would be comfortable in recommending the following use of your TIAA account.

Fill out as much of your 20% bond allocation as you can with Traditional.

If any funds left, fill out as much of your 8% REIT allocation with TREA.

If any funds still left, use CREF Stock.

Dick

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Re: TIAA-CREF Fund Choices

Post by House Blend » Tue Jul 02, 2013 9:28 pm

mike127,

Are you trying to replicate the same portfolio in each account? After looking at your earlier thread, it looks like you've got way too many accounts for this to be feasible, unless you're a masochist.

Appears that spouse's 457, 403b, and deferred comp plans have maybe 10%, 5%, and 2.5% of the total assets involved.

So the alternative is to use one or two funds in each of those accounts that best fit with your overall AA. Make up the shortfalls elsewhere. (Spouse might not be happy with 100% stocks or 100% bonds, so perhaps one needs to tread carefully.)

For example, you might use only
VTSGX (Total International), and
TIAA Traditional or VBTSX (Total Bond)
in the accounts.

I wouldn't bother with trying to approximate TSM with 500 Index plus a Small Cap Index when you can get TSM more easily from other accounts. Or you could use just the 500 index here, and get Extended Markets Index in an IRA. Extended Markets is designed to hold exactly what is in TSM minus the 500 index.

I would skip all of the Variable Annuity Accounts except possibly TIAA Real Estate.

To repeat something that has been said several times already, don't put any money into TIAA Traditional until you have determined what types of contracts she has. The 457, 403b, and DC plan might each have a different contract. The most common ones are labeled RA, GRA, SRA, GSRA, RC, RCP. Once you've figured out what types of contracts you have, make sure you understand and are willing to accept the restrictions on transfers for those contracts.

The wiki article on Traditional is rather weak.

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Re: TIAA-CREF Fund Choices

Post by raywax » Wed Jul 03, 2013 8:19 am

To repeat something that has been said several times already, don't put any money into TIAA Traditional until you have determined what types of contracts she has. The 457, 403b, and DC plan might each have a different contract. The most common ones are labeled RA, GRA, SRA, GSRA, RC, RCP. Once you've figured out what types of contracts you have, make sure you understand and are willing to accept the restrictions on transfers for those contracts.

If the OP does not know the official designation of his accounts he can get that information by calling T-C.

Ray

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Re: TIAA-CREF Fund Choices

Post by The Wizard » Wed Jul 03, 2013 8:43 am

raywax wrote:To repeat something that has been said several times already, don't put any money into TIAA Traditional until you have determined what types of contracts she has. The 457, 403b, and DC plan might each have a different contract. The most common ones are labeled RA, GRA, SRA, GSRA, RC, RCP. Once you've figured out what types of contracts you have, make sure you understand and are willing to accept the restrictions on transfers for those contracts.

If the OP does not know the official designation of his accounts he can get that information by calling T-C.

Ray
The OP's wife should be able to log into TIAA-CREF and expand each "plan" to determine what it is.
RA/GRA plans have a 9 year restriction in moving money OUT of Trad but are presently crediting new contributions at 3.4%.
SRA/GSRA plans have no transfer restrictions but typically credit new contributions at a lower rate, presently 3.0%.
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jjustice
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Re: TIAA-CREF Fund Choices

Post by jjustice » Wed Jul 03, 2013 9:39 am

If you have access to the higher-paying RA or GRA Traditional accounts, I wouldn't (didn't) spend one second worrying about the restricted liquidity. Leave whatever you contribute in there until you retire and then annuitize the entire account. You'll be very happy you did, as I and others I know have been.

John

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Re: TIAA-CREF Fund Choices

Post by ofcmetz » Wed Jul 03, 2013 9:55 am

When I log onto my 403B it shows the type of account I have next to my investments. If she has the GSRA contract then the Traditional is fairly liquid. I use the Traditional and TIAA Real Estate in my TIAA accounts.

As another poster said, its easier to view all your accounts together as one portfolio rather than to have a separate asset allocation for each one. You can take one of your bigger accounts and hold a little of each asset in that account. Then you could use that account for your rebalancing.
Last edited by ofcmetz on Wed Jul 03, 2013 1:38 pm, edited 1 time in total.
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Re: TIAA-CREF Fund Choices

Post by DickBenson » Wed Jul 03, 2013 11:51 am

The Wizard wrote: RA/GRA plans have a 9 year restriction in moving money OUT of Trad but are presently crediting new contributions at 3.4%.
The GRA restriction is only 5 years (edit: after termination of employment, otherwise 9 years) and (like the RC but unlike the RA) you can withdraw all of your funds with a 2.5% penalty if you do so within 120 days of termination of employment.

The other main differences are that the RC contracts can have a minimum guarantee of 1% and a withdrawal restriction of 7 years.

And of course the SRA, GSRA, and RCP funds have no withdrawal restrictions.

Dick
Last edited by DickBenson on Wed Jul 03, 2013 1:07 pm, edited 1 time in total.

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Re: TIAA-CREF Fund Choices

Post by The Wizard » Wed Jul 03, 2013 12:14 pm

jjustice wrote:If you have access to the higher-paying RA or GRA Traditional accounts, I wouldn't (didn't) spend one second worrying about the restricted liquidity. Leave whatever you contribute in there until you retire and then annuitize the entire account. You'll be very happy you did, as I and others I know have been.

John
Having some amount of Trad in both a GRA and a GSRA can be a good strategy. Trad in the GRA is for end-game planning, as John mentions. Trad in your GSRA can be used for rebalancing into equities as conditions dictate.
And in my case, the bulk of my TREA is in my GSRA with the plan to move it to Trad as a safe haven in the event of another Real Estate downfall...
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MN Finance
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Re: TIAA-CREF Fund Choices

Post by MN Finance » Wed Jul 03, 2013 2:51 pm

I like the original idea you posted, low cost funds.

To all the TIAA business, if you indeed use this as part of your bond allocation, you'll probably prefer the"liquid version." The easiest way to determine that is who put the money in. Contributions by the employer or matching dollars will always be put into an illiquid contract (w.r.t. Traditional). Voluntary, non matching contributions will always be put into a liquid contract.

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mike127
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Re: TIAA-CREF Fund Choices

Post by mike127 » Wed Jul 03, 2013 3:18 pm

It looks like my wife has the GRA version of Traditional in her DC account (the one at 3.4% with the transfer restrictions discussed above) but the GSRA version (3% guarantee) in the 403b/457b accounts. It seems like the GRA version is only available for accounts tht are employer-paid.

Seems like there are a mix of views here on the benefits of the GRA version, which is less liquid but has a higher benefit, whereas MN Finance correctly points out that getting flexibility with the funds is valuable (albeit coming at a (currently) 0.40% annual cost). That said, I am young enough that I expect my stable asset AA needs to increase, not decrease, over the next 10 years -- and don't expect to retire in that period -- so maybe this is less if a concern?

House Blend: I'm not trying to replicate the same portfolio in each account, which clearly would be near impossible. Instead I'm trying to come up with a short list of assets that would go into each of my four asset classes and use them together to get a specified AA across my accounts.

I'm less clear from the thread below about exactly how TREA works, though, or why it's advantageous over a traditional mutual fund (see http://www.forbes.com/2010/07/02/variab ... dauer.html, which, granted, does cite TIAA-CREF as a lower cost provider). Why is this better than a standard REIT mutual fund (particularly one with lower expenses)?

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Re: TIAA-CREF Fund Choices

Post by avalpert » Wed Jul 03, 2013 3:27 pm

mike127 wrote:
I'm less clear from the thread below about exactly how TREA works, though, or why it's advantageous over a traditional mutual fund (see http://www.forbes.com/2010/07/02/variab ... dauer.html, which, granted, does cite TIAA-CREF as a lower cost provider). Why is this better than a standard REIT mutual fund (particularly one with lower expenses)?
TREA directly owns commercial Real Estate - it is a true Real Estate fund rather than a REIT. I don't think the expenses are comparable at all, the expenses for TREA include the cost of managing the real estate - while that won't come across in the ER on a REIT fund but it is ultimately being paid as it is part of the operating costs of the entities owned by the REIT. The reason I prefer it as an alternative asset class is because it actually is that asset class rather than an equity - it thus is less correlated to equities than REITs and less volatile, which are the primary reasons I have a real estate holding in the first place.

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Re: TIAA-CREF Fund Choices

Post by House Blend » Wed Jul 03, 2013 4:31 pm

mike127 wrote:Seems like there are a mix of views here on the benefits of the GRA version, which is less liquid but has a higher benefit, whereas MN Finance correctly points out that getting flexibility with the funds is valuable (albeit coming at a (currently) 0.40% annual cost). That said, I am young enough that I expect my stable asset AA needs to increase, not decrease, over the next 10 years -- and don't expect to retire in that period -- so maybe this is less if a concern?
IMO the typical reasons it might be a concern for some people, not necessarily you, are:

a) Spouse leaves her current job, and you are no longer able to add new money to Traditional. (You'd still have the option of Traditional in an IRA, but it is only guaranteed to pay 1%.) The amounts in the account are small and a shrinking percentage of the total portfolio, so you'd rather consolidate in a VG IRA or her new employer's plan. The 5 or 10 year lock up or 2.5% surrender charge makes this consolidation more of an obstacle. (Your employer may have additional obstacles--mine says you can't touch anything in an RA, no matter what funds it is invested in, even after you leave, until you reach age 55.)

b) You reach retirement age, and decide either that annuitizing isn't right for you, or that you have accumulated more in GRA/Traditional than you want to annuitize. Maybe you want to do a rollover and Roth conversion with half of it instead. You can, but again there are obstacles.

c) 100% of your fixed income is Traditional in a GRA. Stocks crash and now you can't rebalance.

Regarding the Real Estate Account, I suggest you read the FAQ:
https://www.tiaa-cref.org/public/pdf/pe ... _Final.pdf

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mike127
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Re: TIAA-CREF Fund Choices

Post by mike127 » Thu Jul 04, 2013 8:12 am

Thanks everyone. This all makes sense but what I'm struggling with is how to square this advice against the general principles that most people talk about on Bogleheads -- diversify through index funds that capture the breadth of the asset class, and choose high quality, low-cost, passive funds. Here, folks are supporting options that are different from that: active, higher cost, less diversified.

Also looking at performance, it seems like TREA hasn't done nearly as well:

Code: Select all

           3yr.    5yr.    10yr. 
VGSLX     18.22   8.11    10.96
TREA      12.85  -1.96    4.73
(These might be slightly off because I couldn't compare TREA using a ticker on Morningstar, but they should be directionally right.)

Is the ability to annuitize worth that much? Not disagreeing, but just trying to integrate this advice with the basic principles I've learned here.

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Re: TIAA-CREF Fund Choices

Post by MN Finance » Thu Jul 04, 2013 9:06 am

The ability to annuitize really means very little bc you can invest for 30 years in a mutual fund, then move money into an annuity the day before you want annuity income.

Real Estate is not going to behave like a REIT. It has half the leverage and isn't exposed to equity risks. This means likely more neutral returns, but also dramatically less risk. I'm on my phone so don't have risk figures, but the standard deviation is something crazy like 5 whereas reits are 3 times that. It's not a must have, but some like it as an option (I have 10% allocated and "take" about half that from my stock allocation and half from bonds). Like mentioned the ER is a bit misleading, but I think some avoid it bc of this. Because of the relative stability of the fund, I don't think I'll be too "wrong" if it doesn't behave like expected.

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Re: TIAA-CREF Fund Choices

Post by jjustice » Thu Jul 04, 2013 10:22 am

As avalpert, in a nice concise post, and MN Finance have said, TIAA Real Estate is not a REIT fund. It will not behave like one. The 3-year Sharpe ratio, a standard measure of return/risk, is 5.67 for the TIAA Real Estate account compared to 1.08 for VGSLX. If you like investing excitement with the possibility of sudden drops, you'll prefer VGSLX, which I also own; but for steady long-term growth, TIAA Real Estate is preferable.

I disagree with MN Finance about the ease of transferring mutual fund assets to annuities when the time comes. First, it is not psychologically easy to divest yourself of a mutual fund which you have built up for years in order to buy an annuity. It is much more comfortable to annuitize an annuity account which you have held for years for just that purpose. Second, by contributing for many years to TIAA Traditional, you make yourself invulnerable to the vagaries of interest rates at the time of annuitization. Third, if the funds are not in a 403(b) that includes TIAA-CREF, you will not have access to these excellent annuity accounts.

John
Last edited by jjustice on Thu Jul 04, 2013 11:59 am, edited 1 time in total.

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Re: TIAA-CREF Fund Choices

Post by House Blend » Thu Jul 04, 2013 10:44 am

mike127 wrote:(These might be slightly off because I couldn't compare TREA using a ticker on Morningstar, but they should be directionally right.)
You can chart TREA on morningstar this-a-way:
http://quote.morningstar.com/fund/chart ... FVUSA04B8Y

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Re: TIAA-CREF Fund Choices

Post by House Blend » Thu Jul 04, 2013 10:49 am

jjustice wrote:Third, if the funds are not in a 403(b) that includes TIAA-CREF, you will not have access to these excellent annuity accounts.
As far as Traditional is concerned, I agree, this matters.

As for the rest, even if you no longer have a T-C 403b, you are still free to roll retirement accounts to a T-C IRA, and annuitize with any of their variable annuities.

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Re: TIAA-CREF Fund Choices

Post by tibbitts » Thu Jul 04, 2013 10:56 am

mike127 wrote:Thanks everyone. This all makes sense but what I'm struggling with is how to square this advice against the general principles that most people talk about on Bogleheads -- diversify through index funds that capture the breadth of the asset class, and choose high quality, low-cost, passive funds. Here, folks are supporting options that are different from that: active, higher cost, less diversified.

Also looking at performance, it seems like TREA hasn't done nearly as well:

Code: Select all

           3yr.    5yr.    10yr. 
VGSLX     18.22   8.11    10.96
TREA      12.85  -1.96    4.73
(These might be slightly off because I couldn't compare TREA using a ticker on Morningstar, but they should be directionally right.)

Is the ability to annuitize worth that much? Not disagreeing, but just trying to integrate this advice with the basic principles I've learned here.
Some points seem valid and some not so valid:

1. Reits are certainly more diversified. It's not clear that TIAA has kept pace with commercial real estate in general. I haven't compared that myself but have read some posts indicating that it's lagged in the recovery, beyond what would be expected by its (now revised) appraisal process.

2. Reits employ entirely active management, so with an index you're buying (admittedly less diversified) active management with passive management.

3. Reits partly capture returns of the asset class, but those returns are heavily influenced by equity risk, which isn't directly related to the asset class. TIAA captures, in theory, pure real estate asset class returns (tempered by its non-trivial investments in Reits, of course.)

Having said that, almost all TIAA enthusiasts would point to what they believe will be an unfaltering ability to time the account, so the returns that a person should have received over the past 10 years would have been dramatically higher than the reported returns. I'm not so convinced that timing will work out the way they believe in future downturns, but TIAA enthusiasts seem to be.

Paul

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Re: TIAA-CREF Fund Choices

Post by mike127 » Thu Jul 04, 2013 1:09 pm

Got it - this all makes a lot of sense. I'm onboard for TIAA Traditional. Not sure I want to fill up my real estate AA with TREA, but I do see the value in doing some of it -- so maybe I will get some experience with it as part of my 8% and shift over time.

Thanks to all of you for taking the time to explain all of this to me -- particularly on the Fourth of July! Yet another reason why Bogleheads is really one of the most valuable financial education resources available today.

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Re: TIAA-CREF Fund Choices

Post by MN Finance » Thu Jul 04, 2013 1:37 pm

jjustice wrote:As avalpert, in a nice concise post, and MN Finance have said, TIAA Real Estate is not a REIT fund. It will not behave like one. The 3-year Sharpe ratio, a standard measure of return/risk, is 5.67 for the TIAA Real Estate account compared to 1.08 for VGSLX. If you like investing excitement with the possibility of sudden drops, you'll prefer VGSLX, which I also own; but for steady long-term growth, TIAA Real Estate is preferable.

I disagree with MN Finance about the ease of transferring mutual fund assets to annuities when the time comes. First, it is not psychologically easy to divest yourself of a mutual fund which you have built up for years in order to buy an annuity. It is much more comfortable to annuitize an annuity account which you have held for years for just that purpose. Second, by contributing for many years to TIAA Traditional, you make yourself invulnerable to the vagaries of interest rates at the time of annuitization. Third, if the funds are not in a 403(b) that includes TIAA-CREF, you will not have access to these excellent annuity accounts.

John
I don't want to take it off topic but you are not "invulnerable" to interest rates on annuity payments just because you have invested for a long time. Not by a long shot. Though currently pre 91 money is paying out at high rates (due to the fact that 1 its old and there's a return of some reserve dollars, and 2 rates where much higher then), you are still primarily subject to the rate environment at the time of annuitization, notwithstanding some differences in vintage payout. There's zero reason to believe (especially given today's low rates) that money invested today will pay out at a higher rate than money invested in something else for 20yrs then transferred the day before annuitization. Though I do agree that if there's money you know you'll annuitize, just start it there now, mostly for psychology as pointed out. Also note they have a pretty substantial life expectancy offset, so regardless what they say payout rates are, they still control the payout amount.

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Re: TIAA-CREF Fund Choices

Post by jjustice » Fri Jul 05, 2013 1:29 pm

Perhaps I should have said 'indifferent to interest rates' rather than 'invulnerable to interest rates.' When you contribute monthly to TIAA Traditional over 3-4 decades, you are doing the very opposite of "annuity timing." When you contribute regularly to Traditional over the years, there is no need to time its annuitization. Your payout rate is not determined by the rates current at annuitization. By contrast, if you decide to invest in other funds with the intention of buying a Traditional annuity when the time comes, you will need to keep a sharp eye on rates. You don't want to buy when rates are low, as they are now. Of course, as with any market timing, some annuity timers will do very well. I just don't care to play games of chance with my retirement.
John

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Re: TIAA-CREF Fund Choices

Post by MN Finance » Fri Jul 05, 2013 6:29 pm

I understand completely what your saying, but the payout rate for all vintages changes every single month to reflect the current return of the underlying investments. Today's rates primarily drive the payout rate, with some modest consideration for the vintage and rate of original deposit, but not a lot. If you would have invested money 20 years ago, at the time it was paying something like 9%. If you annuitized that money at the time you'd probably get a 9% effective payout. A few years ago those same dollars would have gotten, maybe a 6% payout rate. And today, those same dollars would get, maybe a 4% payout rate. The fact that it was sitting there for 20 years doesn't mean much, or certainly doesn't insulate it. Compare that to money freshly deposited today and then annuitized which might pay out at 3.5%. There's some retention of the original characteristics but today's rates drive this. [I'm totally guessing on the exact rates used in my ex., but shouldn't be too far off.] Maybe this is a minor point considering the OPs practical decision today, but there's indeed a reason the annuity quote you get today would be different than the one you got a week ago.

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Re: TIAA-CREF Fund Choices

Post by jjustice » Fri Jul 05, 2013 7:51 pm

Yes, later rates exert a gravitational pull on vintage payout rates, but that force is less than you think it is. Those of us who began contribuing in the 70s have been well served by Traditional. Here are current payout rates:

Payout Stage Interest Rates for Lifetime Annuities Issued During July 2013 for Benefits Arising From:
2013 vintage 3.00%
2012 vintage 3.25%
2010 - 2011 vintages 4.25%
1998 - 2009 vintages 4.50%
1992 - 1997 vintages 5.00%
Pre-1992 vintages 7.75%

John

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