Help explain TIAA Traditional to me

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Culbretd
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Joined: Sat Mar 24, 2018 4:06 am

Help explain TIAA Traditional to me

Post by Culbretd » Mon Aug 13, 2018 9:53 am

So my wife works for a University and her 401a is with TIAA Cref. I was looking at her investments and was wondering if we should go with TIAA Tradional or just stick with the regular Bond fund.

Here are the choices for the Traditional funds:

up Retirement Annuity Guaranteed
Guarantees are based on the claims-paying ability of TIAA. TIAA Traditional is a guaranteed insurance contract and not an investment for federal securities law purposes.

TIAA Fixed Annuity / TIAA Traditional Annuity 4.00. 3.00% 3.80% 3.92% 3.97% 4.10% -- 7/31/2018
TIAA Traditional Annuity - Retirement Annuity Guaranteed
Guarantees are based on the claims-paying ability of TIAA. TIAA Traditional is a guaranteed insurance contract and not an investment for federal securities law purposes.

TIAA Fixed Annuity / TIAA Traditional Annuity 4.00% 3.00% 3.80% 3.92% 3.97% 4.10% -- 7/31/2018
TIAA Traditional Annuity - Retirement Choice Guaranteed

Guarantees are based on the claims-paying ability of TIAA. TIAA Traditional is a guaranteed insurance contract and not an investment for federal securities law purposes.

TIAA Fixed Annuity / TIAA Traditional Annuity 4.25% 1.00% 4.06% 4.21% 4.28% 4.33% 4.48% 7/31/2018

The first 2 options are paying a guaranteed rate of 3% and are currently paying 4%.
The 3rd option is a guaranteed rate of 1% but currently paying 4.25%
The other columns are 1year, 3, year, 5year, and 10year returns.

Can anyone help me decipher the differences between these 3 funds.

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wjo
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Re: Help explain TIAA Traditional to me

Post by wjo » Mon Aug 13, 2018 11:13 am

You would probably find a better response over at the TIAA forum at Morningstar, where they are specialists in this.

In general, TIAA Traditional is a solid stable value type fund with good rates but with liquidity restrictions on the higher interest rates. It is a solid investment choice used by many over the years as a foundation for savings.

A simple approach would be to split money between the bond and Traditional funds, and use the bond money for liquidity (for example, when you rebalance).

The Traditional fund is a bit complicated, but it would be well worth the effort to learn about how it works. Again, the Morningstar forum people are likely your best source. The TIAA website has resources as well.

Culbretd
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Joined: Sat Mar 24, 2018 4:06 am

Re: Help explain TIAA Traditional to me

Post by Culbretd » Mon Aug 13, 2018 11:40 am

wjo wrote:
Mon Aug 13, 2018 11:13 am
You would probably find a better response over at the TIAA forum at Morningstar, where they are specialists in this.

In general, TIAA Traditional is a solid stable value type fund with good rates but with liquidity restrictions on the higher interest rates. It is a solid investment choice used by many over the years as a foundation for savings.

A simple approach would be to split money between the bond and Traditional funds, and use the bond money for liquidity (for example, when you rebalance).

The Traditional fund is a bit complicated, but it would be well worth the effort to learn about how it works. Again, the Morningstar forum people are likely your best source. The TIAA website has resources as well.
I will post and ask over there. Can’t believe that forums slipped my mind when I started thinking about Traditional.

Thank You

ofckrupke
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Re: Help explain TIAA Traditional to me

Post by ofckrupke » Mon Aug 13, 2018 11:46 am

The situation is somehow being misconveyed to you.
First, there will turn out to be only two flavors of traditional offered in the plan: Retirement Annuity (RA), and Retirement Choice (RC). RA is the one now crediting at 4.0% per annum; RC is the one now crediting at 4.25%.
Second, for participants sufficiently new to the plan, RC (a more recently developed flavor) will probably be the only option.
Participants with older standing may or may not have their RA contracts frozen to new contributions, but almost certainly have access to RC.

Basically, RA is a contract between TIAA and the participant; RC is a contract between TIAA and the employer/sponsor, with (weaker) promises conveyed to the participants in the form of a participant certificate. The gradual replacement of RA with RC is broadly speaking a bargain struck between TIAA and sponsors nationwide; TIAA gets mitigation of long term risks associated with the RA contract's 3% minimum crediting rate promise in event of a protracted low-interest rate market environment (think Japan since ~1995), and the sponsors get more freedom in the range of alternative (and particularly non-TIAA) investment products allowed to be offered under TIAA custody in the same plan menu as Traditional. The RC participants get typically, but by no obligation, 0.25% higher crediting than RA, in normal interest rate environments.

These are both illiquid flavors of Traditional Annuity, but in this respect they differ slightly: to get an existing accumulation of RA re-deployed takes 9 years and a day; for RC it's 7 years, plus RC offers a get-out option upon departure from the job at cost of a few percent of the accumulation (which might under certain nose-holding circumstances be helpful).

The main difference though is that if push comes to shove (again, protracted superlow interest rate world) TIAA can pay as low as 1% on RC accumulations, while RA still pays 3%. And as compensation for that, in normal times the RC does typically credit at the RA rate plus 0.25% pa. But the demerit of RC's lowball guarantee is so obvious that my spouse's plan had to pay a national consulting firm to write up an opinion document dismissing the tail risk of the Japan scenario to give them a fig leaf for the decision to freeze all RA contracts and replace them, for ongoing contributions, with RC. We have opted for the short term to contribute to the RC contract, but at some point in the next couple of years we will probably stop, and re-direct new money elsewhere. At least for this part of our portfolio, the +2% difference in a drought is everything; the quarter percent in normal times is nothing.

beardsworth
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Re: Help explain TIAA Traditional to me

Post by beardsworth » Mon Aug 13, 2018 11:52 am

OP, numerous publications about TIAA Traditional are available just by doing a simple search for that term at TIAA's own website. They include Frequently Asked Questions, and comparisons of different contract types. Did you try that?

https://www.tiaa.org/public/search-resu ... raditional

Culbretd
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Re: Help explain TIAA Traditional to me

Post by Culbretd » Mon Aug 13, 2018 12:04 pm

beardsworth wrote:
Mon Aug 13, 2018 11:52 am
OP, numerous publications about TIAA Traditional are available just by doing a simple search for that term at TIAA's own website. They include Frequently Asked Questions, and comparisons of different contract types. Did you try that?

https://www.tiaa.org/public/search-resu ... raditional
Sure did [(removed) --admin LadyGeek] but doing my investigated work I also wanted to get a Bogleheads perspective on it. Sometimes having someone(s) personal experience explains something to you saves you from some pitfalls that aren’t covered on fact sheets or Frequently asked questions on a website where they are just trying to sell you something.

Culbretd
Posts: 51
Joined: Sat Mar 24, 2018 4:06 am

Re: Help explain TIAA Traditional to me

Post by Culbretd » Mon Aug 13, 2018 12:06 pm

ofckrupke wrote:
Mon Aug 13, 2018 11:46 am
The situation is somehow being misconveyed to you.
First, there will turn out to be only two flavors of traditional offered in the plan: Retirement Annuity (RA), and Retirement Choice (RC). RA is the one now crediting at 4.0% per annum; RC is the one now crediting at 4.25%.
Second, for participants sufficiently new to the plan, RC (a more recently developed flavor) will probably be the only option.
Participants with older standing may or may not have their RA contracts frozen to new contributions, but almost certainly have access to RC.

Basically, RA is a contract between TIAA and the participant; RC is a contract between TIAA and the employer/sponsor, with (weaker) promises conveyed to the participants in the form of a participant certificate. The gradual replacement of RA with RC is broadly speaking a bargain struck between TIAA and sponsors nationwide; TIAA gets mitigation of long term risks associated with the RA contract's 3% minimum crediting rate promise in event of a protracted low-interest rate market environment (think Japan since ~1995), and the sponsors get more freedom in the range of alternative (and particularly non-TIAA) investment products allowed to be offered under TIAA custody in the same plan menu as Traditional. The RC participants get typically, but by no obligation, 0.25% higher crediting than RA, in normal interest rate environments.

These are both illiquid flavors of Traditional Annuity, but in this respect they differ slightly: to get an existing accumulation of RA re-deployed takes 9 years and a day; for RC it's 7 years, plus RC offers a get-out option upon departure from the job at cost of a few percent of the accumulation (which might under certain nose-holding circumstances be helpful).

The main difference though is that if push comes to shove (again, protracted superlow interest rate world) TIAA can pay as low as 1% on RC accumulations, while RA still pays 3%. And as compensation for that, in normal times the RC does typically credit at the RA rate plus 0.25% pa. But the demerit of RC's lowball guarantee is so obvious that my spouse's plan had to pay a national consulting firm to write up an opinion document dismissing the tail risk of the Japan scenario to give them a fig leaf for the decision to freeze all RA contracts and replace them, for ongoing contributions, with RC. We have opted for the short term to contribute to the RC contract, but at some point in the next couple of years we will probably stop, and re-direct new money elsewhere. At least for this part of our portfolio, the +2% difference in a drought is everything; the quarter percent in normal times is nothing.

Thank you for the excellent post. Really leaning toward putting half my bond allocation in Traditional.

aristotelian
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Re: Help explain TIAA Traditional to me

Post by aristotelian » Mon Aug 13, 2018 12:44 pm

I have the 1% guaranteed (4.25% total) version with no other options. I did elect to make it 50% of my bond allocation. I have considered their bond fund but the expense ratio is awfully high in my plan. Hopefully I am not making a mistake but so far it has paid off. At least in a Japan scenario, 1% guaranteed will still be a pretty good return. :D :shock:

adam1712
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Re: Help explain TIAA Traditional to me

Post by adam1712 » Mon Aug 13, 2018 1:06 pm

I think it's worth at least trying a small investment into Traditional. And I'd recommend that before dumping a large amount into it. It's hard to fully understand how it works until you start investing in it. I think most people that try it are happy with it.

Just make sure you understand the withdrawal constraints and the minimum rate. I have the Retirement Choice Plus (RCP) rather than RC. Since the RCP is fully liquid with no withdrawal constraints, I have less concern about the minimum rate. But even with the minimum rate risk in RC, you can have half your money out in 3.5 years and all out in 7.

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greg24
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Re: Help explain TIAA Traditional to me

Post by greg24 » Mon Aug 13, 2018 1:15 pm

I'm lucky in that my 403b contains TIAA Traditional and Vanguard TBM index funds.

I use a 60/40 AA, and I put my fixed income allocations in these two holdings, 50% in each.

Culbretd
Posts: 51
Joined: Sat Mar 24, 2018 4:06 am

Re: Help explain TIAA Traditional to me

Post by Culbretd » Mon Aug 13, 2018 3:35 pm

That is what I was confused about at first, I was under the impression that all traditional annuities were 10 year payouts but it seems there is 7 year payouts too for these funds. Like I said these past couple of plays I've learned a lot about tiaa cref.

Thanks for everyone posting an helping out. Really appreciate this site.

InMyDreams
Posts: 350
Joined: Tue Feb 28, 2017 11:35 am

Re: Help explain TIAA Traditional to me

Post by InMyDreams » Mon Aug 13, 2018 8:48 pm

ofckrupke wrote:
Mon Aug 13, 2018 11:46 am
The situation is somehow being misconveyed to you.
First, there will turn out to be only two flavors of traditional offered in the plan: Retirement Annuity (RA), and Retirement Choice (RC). RA is the one now crediting at 4.0% per annum; RC is the one now crediting at 4.25%.
Second, for participants sufficiently new to the plan, RC (a more recently developed flavor) will probably be the only option.
Participants with older standing may or may not have their RA contracts frozen to new contributions, but almost certainly have access to RC.

Basically, RA is a contract between TIAA and the participant; RC is a contract between TIAA and the employer/sponsor, with (weaker) promises conveyed to the participants in the form of a participant certificate. The gradual replacement of RA with RC is broadly speaking a bargain struck between TIAA and sponsors nationwide; TIAA gets mitigation of long term risks associated with the RA contract's 3% minimum crediting rate promise in event of a protracted low-interest rate market environment (think Japan since ~1995), and the sponsors get more freedom in the range of alternative (and particularly non-TIAA) investment products allowed to be offered under TIAA custody in the same plan menu as Traditional. The RC participants get typically, but by no obligation, 0.25% higher crediting than RA, in normal interest rate environments.

These are both illiquid flavors of Traditional Annuity, but in this respect they differ slightly: to get an existing accumulation of RA re-deployed takes 9 years and a day; for RC it's 7 years, plus RC offers a get-out option upon departure from the job at cost of a few percent of the accumulation (which might under certain nose-holding circumstances be helpful).

The main difference though is that if push comes to shove (again, protracted superlow interest rate world) TIAA can pay as low as 1% on RC accumulations, while RA still pays 3%. And as compensation for that, in normal times the RC does typically credit at the RA rate plus 0.25% pa. But the demerit of RC's lowball guarantee is so obvious that my spouse's plan had to pay a national consulting firm to write up an opinion document dismissing the tail risk of the Japan scenario to give them a fig leaf for the decision to freeze all RA contracts and replace them, for ongoing contributions, with RC. We have opted for the short term to contribute to the RC contract, but at some point in the next couple of years we will probably stop, and re-direct new money elsewhere. At least for this part of our portfolio, the +2% difference in a drought is everything; the quarter percent in normal times is nothing.
thanks. a very useful description of the big black box that I will need to deal with soon.

sorry, I wasn't successful in registering at morningstar's tiaa forum, and, well, I like the answers I get here.

and the moderators here are the best!

student
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Re: Help explain TIAA Traditional to me

Post by student » Mon Aug 13, 2018 9:02 pm

Just a data point. I essentially use TIAA Traditional for my fixed income.

SimplicityNow
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Re: Help explain TIAA Traditional to me

Post by SimplicityNow » Mon Aug 13, 2018 10:44 pm

For the liquidity restrictions and choices available I would ask TIAA directly.

Options, rates, liquidity restrictions are not universal and vary by institution and plan.

student
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Re: Help explain TIAA Traditional to me

Post by student » Tue Aug 14, 2018 5:08 am

SimplicityNow wrote:
Mon Aug 13, 2018 10:44 pm
For the liquidity restrictions and choices available I would ask TIAA directly.

Options, rates, liquidity restrictions are not universal and vary by institution and plan.
It is a good suggestion to ask TIAA directly. I do not understand your statement "Options, rates, liquidity restrictions are not universal and vary by institution and plan." In some level it is true but in another level it may not. Although there are many flavors of TIAA Traditional, once a flavor is identified such as TIAA Traditional Annuity - Group Retirement Annuity, then the rates and liquidity restriction should be the same across all institutions. The rate depends on the day that one contributes. For example, https://www.tiaa.org/public/investment- ... r=47933632 I do not know what do you mean by options.

The Wizard
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Re: Help explain TIAA Traditional to me

Post by The Wizard » Tue Aug 14, 2018 6:09 am

I hold no bond funds anymore. The bulk of my investments are with TIAA where I hold both flavors of Trad: 9-year restricted Trad paying 4.0% for new money and unrestricted Trad paying 3.25% for new money.
I will obviously use the latter for rebalancing if the need arises...
Attempted new signature...

SimplicityNow
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Re: Help explain TIAA Traditional to me

Post by SimplicityNow » Tue Aug 14, 2018 6:41 pm

student wrote:
Tue Aug 14, 2018 5:08 am
SimplicityNow wrote:
Mon Aug 13, 2018 10:44 pm
For the liquidity restrictions and choices available I would ask TIAA directly.

Options, rates, liquidity restrictions are not universal and vary by institution and plan.
It is a good suggestion to ask TIAA directly. I do not understand your statement "Options, rates, liquidity restrictions are not universal and vary by institution and plan." In some level it is true but in another level it may not. Although there are many flavors of TIAA Traditional, once a flavor is identified such as TIAA Traditional Annuity - Group Retirement Annuity, then the rates and liquidity restriction should be the same across all institutions. The rate depends on the day that one contributes. For example, https://www.tiaa.org/public/investment- ... r=47933632 I do not know what do you mean by options.
Fair enough. I didn't read the OP carefully enough and saw that he specified GRA and RC.

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jjustice
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Re: Help explain TIAA Traditional to me

Post by jjustice » Tue Aug 14, 2018 6:54 pm

Probably the best single source of information about TIAA Traditional is TIAA's white paper.

https://www.tiaa.org/public/pdf/complia ... -paper.pdf

All of the fixed income in my retirement account is in Traditional. It is steadier, and may have a higher return over the next few years, than bond funds whose prices fluctuate inversely with interest rates.

John

bikechuck
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Re: Help explain TIAA Traditional to me

Post by bikechuck » Tue Aug 14, 2018 8:45 pm

What happens to a TIAA Traditional account if the owner dies and their spouse inherits the account? Is this a situation where there is no step up in basis available and thus a large taxable event for the surviving spouse?

I have been feeling good about my TIAA Traditional account and I too have been using it as a substitute for a bond fund but I have not spent enough time trying to determine what my wife will someday face when she inherits my account.

NoHeat
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Re: Help explain TIAA Traditional to me

Post by NoHeat » Tue Aug 14, 2018 9:06 pm

bikechuck wrote:
Tue Aug 14, 2018 8:45 pm
What happens to a TIAA Traditional account if the owner dies and their spouse inherits the account? Is this a situation where there is no step up in basis available and thus a large taxable event for the surviving spouse?

I have been feeling good about my TIAA Traditional account and I too have been using it as a substitute for a bond fund but I have not spent enough time trying to determine what my wife will someday face when she inherits my account.
It depends on whether you annuitize it.

Jackson12
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Re: Help explain TIAA Traditional to me

Post by Jackson12 » Tue Aug 14, 2018 9:59 pm

bikechuck wrote:
Tue Aug 14, 2018 8:45 pm
What happens to a TIAA Traditional account if the owner dies and their spouse inherits the account? Is this a situation where there is no step up in basis available and thus a large taxable event for the surviving spouse?

I have been feeling good about my TIAA Traditional account and I too have been using it as a substitute for a bond fund but I have not spent enough time trying to determine what my wife will someday face when she inherits my account.
I contacted a TIAA rep directly and was told the payout options and rates change when the primary account holder dies. I don’t recall all the details but I suggest you speak with someone from TIAA to clarify those. This post is a reminder that I need to review them again.

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