Composition and safety of TIAA traditional annuity

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Nittany_Lion
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Composition and safety of TIAA traditional annuity

Post by Nittany_Lion »

Hello Folks,

After much searching, I discovered the following document, which displays the investment portfolio for TIAA's general account. I believe this is the pool of money that supports the traditional annuity, currently yielding 3.25% for those who invest in a supplemental retirement annuity, and more if you are prepared to lock in for nine years and a day.

https://www.tiaa.org/public/pdf/perform ... rength.pdf

This strikes me as an excellent yield for a stable-value fund and I am reticent to give it up for the lower yields of the other fixed-income investments available to me through my retirement accounts, such as Total Bond, although I do have a diversified set of FI investments, including Total Bond, TIPS, VG's international bond, and some treasury funds. All told, I have about 16% of my wealth in TIAA Traditional.

The issue that is bothering me is the guarantee and how likely it would be to hold up in a true financial meltdown scenario, such as the Great Depression, or something slightly worse than 2008.

I am not a financial professional or accountant and am wondering what role 38 billion labeled as "capital and surpluses" might play in such a scenario. Is it a way of meeting the guarantees without divesting from the account's main investments?

Also, I wonder if anyone knows what fraction of those invested in the Traditional Annuity are locked in for the nine years, which presumably offers some protection against a run on the account's assets in the event of financial crisis.

Any thoughts on any of this would be much appreciated!
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Re: Composition and safety of TIAA traditiona annuity

Post by oldzey »

I use both the RA (restricted, 9 years + 1 day to completely withdraw) and GSRA (liquid) versions of TIAA Traditional. It is the only fixed income investment I use and it is an excellent stable value fund. I use the TIAA Traditional in my GSRA to rebalance, if needed. However, I monitor my automatic contributions to TIAA and have not had to rebalance for some time now.

I do plan to annuitize some of my TIAA Traditional upon retirement. I am currently 51 and plan to retire at 67. TIAA is a financially stable company that I don't expect to go bankrupt. No guarantees, of course. More information about this at the top of the document you linked: https://www.tiaa.org/public/pdf/perform ... rength.pdf

Here is my current AA (my target AA is 67% equities, 26% fixed income, and 7% Real Estate):

EQUITIES
27.59% TIEIX - TIAA-CREF Equity Index Fund (Institutional) (403b GSRA)
24.95% VTSAX - Vanguard Total Stock Market Index Fund Admiral Shares (ROTH)
13.89% VONE - Vanguard Russell 1000 ETF (TAXABLE)

FIXED INCOME
19.32% TIAA Traditional (403b RA) - Restricted
6.91% TIAA Traditional (403b GSRA) - Liquid

REAL ESTATE
7.34% QREARX - TIAA Real Estate Account (403b GSRA)
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Re: Composition and safety of TIAA traditiona annuity

Post by whomever »

FWIW, Standard & Poors currently rates the TIAA general account and US Government debt the same: AA+. Whether that gives you the warm fuzzies or scares you is up to the reader :-)

It does hold more corporate/less gov't bonds that I would of guessed. I'm not a finance type either, but I suppose the ratio of assets to liabilities matters, in addition to the credit quality of the holdings.
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Re: Composition and safety of TIAA traditiona annuity

Post by rgs92 »

I personally wouldn't worry at all about TIAA.
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Nittany_Lion
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Re: Composition and safety of TIAA traditiona annuity

Post by Nittany_Lion »

I guess the key issue is whether this is a unique investing opportunity whereby TIAA, as they claim, has been able to lever into some relatively safe, albeit less liquid, investments, with the excess yield being compensation for the lower liquidity. Or, instead, are they reaching for yield without enough of a cushion to honor the guarantee is times of extreme stress (something worse than 2008, for example)?

If it's the latter, the guarantee could paradoxically make the fund more risky in that a failure to pay could throw them into some kind of bankruptcy proceeding, with all of the uncertainty that entails.

OTOH, if they have set aside a reserve of some kind as insurance against just this type of eventuality -- as in the "capital and surpluses" alluded to in the document -- then I would feel better about pocketing what is mostly a premium for a lack of liquidity.

NL
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Re: Composition and safety of TIAA traditiona annuity

Post by oldzey »

You might find some documents to help answer your questions here: https://www.tiaa.org/public/about-tiaa/ ... nt-library
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Re: Composition and safety of TIAA traditiona annuity

Post by Spinola »

TIAA Annuity has been around since 1918. It already survived the great depression.. and everything else since..
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Re: Composition and safety of TIAA traditiona annuity

Post by student »

Although I can say with certainty, I believe in it enough that I use TIAA Traditional for essentially my fixed income allocation.

Correction: "can" should be "can't" in my reply.
Last edited by student on Sun May 12, 2019 5:43 pm, edited 1 time in total.
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Re: Composition and safety of TIAA traditiona annuity

Post by 22twain »

whomever wrote: Sat May 11, 2019 12:14 pm FWIW, Standard & Poors currently rates the TIAA general account and US Government debt the same: AA+. Whether that gives you the warm fuzzies or scares you is up to the reader :-)
IIRC during the showdown between the US Congress and administration over the federal debt ceiling in summer 2011, at least one of the credit rating agencies downgraded the US government to below TIAA.
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Re: Composition and safety of TIAA traditiona annuity

Post by oldzey »

Nittany_Lion, you might be familiar with the TIAA Funds forums over at Morningstar.

If not, just a heads-up that there is a wealth of information posted there about a wide variety of topics, including TIAA Traditional.

Here is the old forum (where 99% of the posts are):
https://discuss.morningstar.com/NewSoci ... 00044.aspx

Here is the new forum (which just opened a couple weeks ago):
https://community.morningstar.com/t5/TI ... /bd-p/TIAA
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Re: Composition and safety of TIAA traditional annuity

Post by talzara »

Nittany_Lion wrote: Sat May 11, 2019 11:13 am The issue that is bothering me is the guarantee and how likely it would be to hold up in a true financial meltdown scenario, such as the Great Depression, or something slightly worse than 2008.

I am not a financial professional or accountant and am wondering what role 38 billion labeled as "capital and surpluses" might play in such a scenario. Is it a way of meeting the guarantees without divesting from the account's main investments?
TIAA is structured as a New York life insurance company.

The life insurance companies survived the Great Depression. That's why the New Deal did not make major changes to insurance regulation, even as Wall Street and banking were being reined in with Glass-Steagall, the FDIC, and the SEC.

"Capital and surpluses" is just assets minus liabilities. A non-insurance company would report it as Shareholder's equity. Moody's reports it as Shareholder's equity in their TIAA credit opinion.
Nittany_Lion wrote: Sat May 11, 2019 11:13 am Also, I wonder if anyone knows what fraction of those invested in the Traditional Annuity are locked in for the nine years, which presumably offers some protection against a run on the account's assets in the event of financial crisis.
TIAA has very little exposure to withdrawals:
Unique liability structure - approximately 75% of TIAA's liabilities are not subject to discretionary withdrawal

https://www.tiaa.org/public/pdf/moodys_eco_report.pdf
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Re: Composition and safety of TIAA traditiona annuity

Post by The Wizard »

student wrote: Sat May 11, 2019 5:24 pm Although I can say with certainty, I believe in it enough that I use TIAA Traditional for essentially my fixed income allocation.
Same here, roughly.
I'm 60% stock funds and my 40% non-stock is split equally between Trad and TREA...
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Re: Composition and safety of TIAA traditional annuity

Post by Tdubs »

TIAA traditional is about 18% of my portfolio--the RA 9 years and a day version. I love the 4 percent return, but I decided against putting in more because they are still a private entity with some risk. It was a little disquieting that the RA vintages going forward just fell in a period of two months from 4.0% to 3.5%. It was also disquieting last year when TIAA did not raise its rates while everything else was going up. It is also concerning that TIAA has lost some colleges recently, such as Michigan State U. How much longer will colleges continue to buy into a family of funds with high ERs and some recent bad publicity? I don't have an answer.

But as others noted above, there are a lot of factors that argue for its stability and the likelihood that it will meet its commitments. So, I'm still in, partly.
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Re: Composition and safety of TIAA traditional annuity

Post by columbia »

Tdubs wrote: Sun May 12, 2019 1:43 pm TIAA traditional is about 18% of my portfolio--the RA 9 years and a day version. I love the 4 percent return, but I decided against putting in more because they are still a private entity with some risk. It was a little disquieting that the RA vintages going forward just fell in a period of two months from 4.0% to 3.5%. It was also disquieting last year when TIAA did not raise its rates while everything else was going up. It is also concerning that TIAA has lost some colleges recently, such as Michigan State U. How much longer will colleges continue to buy into a family of funds with high ERs and some recent bad publicity? I don't have an answer.

But as others noted above, there are a lot of factors that argue for its stability and the likelihood that it will meet its commitments. So, I'm still in, partly.

I’m not super concerned about it losing customers. We have to pay a (quarterly? I should remember that...) fee for using any non-TIAA funds. The model seems to be to pass the higher costs (aka revenue streams for TIAA) on to the employees.
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Re: Composition and safety of TIAA traditional annuity

Post by oldzey »

Nittany_Lion, Here are some supplemental links to various information about TIAA Traditional that I have posted before:

CALCULATING TIAA TRADITIONAL ANNUITY EARNINGS 2005

Frequently asked questions about TIAA Traditional Annuity

The Intricacies of TIAA-Traditional

Is TIAA Traditional a Good Deal? - The Accumulation Phase

Best,
oldzey
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Re: Composition and safety of TIAA traditiona annuity

Post by bikechuck »

.

I do plan to annuitize some of my TIAA Traditional upon retirement. I am currently 51 and plan to retire at 67.
[/quote]

I also have both flavors of TIAA Traditional, although I am already retired I have not yet annuitized them and will not consider doing so until my mid 70s when I could benefit from higher mortality credits and potentially higher interest rates. I might never annuitize them if my portfolio is holding up well when I reach my mid 70s. Meanwhile I am enjoying the yield and the lack of principal risk associated with interest rate fluctuations.

I am curious about your plans to annuitize some of your traditional at age 67. Am I overlooking something that I should be considering?
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Re: Composition and safety of TIAA traditional annuity

Post by oldzey »

bikechuck wrote: Sun May 12, 2019 8:42 pmI am curious about your plans to annuitize some of your traditional at age 67. Am I overlooking something that I should be considering?
Annuities are appealing to me because I got a late start saving for retirement. It is likely that I will continue to work past 67 (full retirement age).

I still have 16 years to mull it over, assuming that I live that long.
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Re: Composition and safety of TIAA traditional annuity

Post by Nittany_Lion »

Thanks everyone, especially Oldzey and Talzara, for all of the helpful links and information. I will stew on this some more, but it sounds as though much of the yield advantage of TIAA Traditional may be going away. Although my "vintage" is still at 3.25%, that is only guaranteed through February or March of next year. In addition, new contributions are being credited at 3.00%, which is not much above the 2.90% yield on Total Bond. For people looking for stable value that remains an advantage of TIAA Traditional, but bond funds are better at hedging declines in the stock market, which is probably the more relevant issue for me (although I wasn't keen on giving up 35 basis points to do it). So, as I said, lots to think about.

Thanks again,

NL
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Re: Composition and safety of TIAA traditional annuity

Post by oldzey »

FWIW, I did exchange some of my liquid TIAA Traditional for more shares of TIEIX (TIAA-CREF Equity Index Fund - Institutional) today. 8-)
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Re: Composition and safety of TIAA traditional annuity

Post by afan »

TIAA does not have any magic investments. It holds a conservative portfolio and adjusts its crediting rates based on market returns. As with any annuity, it protects the annuitants by using mortality credits to pay those who have long lives.

Between its traditional management and state guarantee funds, there is little reason to worry that you will not get your promised return. Note that the current returns are not promised forever. If the market returns go down then so will the rates TIAA pays.
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Re: Composition and safety of TIAA traditional annuity

Post by willthrill81 »

afan wrote: Mon May 13, 2019 6:29 pm TIAA does not have any magic investments.
No, but it does have some rather unique investments. TIAA Traditional is one of them, and TIAA Real Estate is another.
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Re: Composition and safety of TIAA traditional annuity

Post by ResearchMed »

afan wrote: Mon May 13, 2019 6:29 pm TIAA does not have any magic investments. It holds a conservative portfolio and adjusts its crediting rates based on market returns. As with any annuity, it protects the annuitants by using mortality credits to pay those who have long lives.

Between its traditional management and state guarantee funds, there is little reason to worry that you will not get your promised return. Note that the current returns are not promised forever. If the market returns go down then so will the rates TIAA pays.
I'd need to double check again, but my understanding is that at least for those who have Trad Annuity as part of a contract (e.g., with our 403b plan; not sure if there are other ways to get Trad Ann?), for money already "in", the 3% minimum IS a "guaranteed" return. It's the extra amounts that aren't guaranteed, and can fluctuate from time to time, as TIAA sees fit.

I don't think TIAA is obligated to keep that rate for future money put in, but not sure if it's within the contracted plan.

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Re: Composition and safety of TIAA traditional annuity

Post by The Wizard »

oldzey wrote: Sun May 12, 2019 9:00 pm
bikechuck wrote: Sun May 12, 2019 8:42 pmI am curious about your plans to annuitize some of your traditional at age 67. Am I overlooking something that I should be considering?
Annuities are appealing to me because I got a late start saving for retirement. It is likely that I will continue to work past 67 (full retirement age).

I still have 16 years to mull it over, assuming that I live that long.
I annuitized a hefty amount with TIAA when I retired at age 63 in 2013.
The majority of annuitized funds was in TREA, with 15% in Trad and another 15% in CREF Stock.
I've found this gives me decent income in retirement to fund discretionary expenses, mainly travel.
And the TREA + CREF Stock tend to keep up with inflation.

I could annuitize additional amounts in my 70s if needed, but right now it doesn't seem like I will need to, with age 70 SS starting in ten months....
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Re: Composition and safety of TIAA traditional annuity

Post by House Blend »

ResearchMed wrote: Mon May 13, 2019 6:42 pm
afan wrote: Mon May 13, 2019 6:29 pm TIAA does not have any magic investments. It holds a conservative portfolio and adjusts its crediting rates based on market returns. As with any annuity, it protects the annuitants by using mortality credits to pay those who have long lives.

Between its traditional management and state guarantee funds, there is little reason to worry that you will not get your promised return. Note that the current returns are not promised forever. If the market returns go down then so will the rates TIAA pays.
I'd need to double check again, but my understanding is that at least for those who have Trad Annuity as part of a contract (e.g., with our 403b plan; not sure if there are other ways to get Trad Ann?), for money already "in", the 3% minimum IS a "guaranteed" return. It's the extra amounts that aren't guaranteed, and can fluctuate from time to time, as TIAA sees fit.

I don't think TIAA is obligated to keep that rate for future money put in, but not sure if it's within the contracted plan.
The 3% + principal is forever -- until death or annuitization or TIAA bankruptcy.

For annuitants, the minimum guarantee is 2.5%. (This is not the same as the payout rate; it's the crediting rate for undistributed principal. The actual payout rate would be higher, depending on the age at annuitization, etc.)

And they can certainly stop accepting new contributions to accounts with 3% guaranteed contracts, and force new contributions, if any, to go into new contracts with less favorable terms.

And they have already done this with Traditional contracts in IRAs. I believe the new-ish RC/RC+ contracts are also a step in that direction. Certainly those contracts have less generous guarantees.

Another thing they've shown willingness to do is spread the pain of a financial crisis unevenly among their participants. In practice, annuitants I think are protected the most, and old (accumulation) vintages next. When things go south, it's the new contributions and liquid accounts that get the shortest straws.
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Re: Composition and safety of TIAA traditional annuity

Post by oldzey »

Here is another resource showing TIAA and CREF contract comparison: https://www.tiaa.org/public/pdf/RC_Comp ... _8_fin.pdf
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Re: Composition and safety of TIAA traditional annuity

Post by columbia »

One needs to avoid a lot of things at TIAA, like their money market account:
https://www.tiaa.org/public/pdf/ffs/87244W706.pdf

0.39% for the retirement class.

Sticking with Traditional or the real estate fund seems wise.
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Re: Composition and safety of TIAA traditional annuity

Post by ResearchMed »

columbia wrote: Wed May 15, 2019 5:48 am One needs to avoid a lot of things at TIAA, like their money market account:
https://www.tiaa.org/public/pdf/ffs/87244W706.pdf

0.39% for the retirement class.

Sticking with Traditional or the real estate fund seems wise.
Those seem to be dated approx a year ago.
Interest rates have changed since then.

I just checked our 403b TIAA MM fund, and the returns are almost the same as Fidelity or Vanguard MM funds.
It's close enough to not matter much which we use more.

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Re: Composition and safety of TIAA traditional annuity

Post by columbia »

ResearchMed wrote: Wed May 15, 2019 7:08 am
columbia wrote: Wed May 15, 2019 5:48 am One needs to avoid a lot of things at TIAA, like their money market account:
https://www.tiaa.org/public/pdf/ffs/87244W706.pdf

0.39% for the retirement class.

Sticking with Traditional or the real estate fund seems wise.
Those seem to be dated approx a year ago.
Interest rates have changed since then.

I just checked our 403b TIAA MM fund, and the returns are almost the same as Fidelity or Vanguard MM funds.
It's close enough to not matter much which we use more.

RM

I was referring to the expense ratio.
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Re: Composition and safety of TIAA traditional annuity

Post by ResearchMed »

columbia wrote: Wed May 15, 2019 7:33 am
ResearchMed wrote: Wed May 15, 2019 7:08 am
columbia wrote: Wed May 15, 2019 5:48 am One needs to avoid a lot of things at TIAA, like their money market account:
https://www.tiaa.org/public/pdf/ffs/87244W706.pdf

0.39% for the retirement class.

Sticking with Traditional or the real estate fund seems wise.
Those seem to be dated approx a year ago.
Interest rates have changed since then.

I just checked our 403b TIAA MM fund, and the returns are almost the same as Fidelity or Vanguard MM funds.
It's close enough to not matter much which we use more.

RM

I was referring to the expense ratio.
AFAIK, the returns for MM funds are *after* expenses.
I'd pay more attention to the returns of various MM funds (many seem quite close, but then there are some that lag woefully).

RM
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Re: Composition and safety of TIAA traditional annuity

Post by Trurl Klapaucius »

Returning to the original post, here is an interesting article regarding the composition and safety of the “public fixed income” bond component of TIAA’s investment portfolio:

Bonds for Retirement Saving: TIAA Traditional’s Lessons on Quality, Duration, Risk, and Gradual Withdrawals by Gabriel A. Lozada Department of Economics, University of Utah Salt Lake City, UT 84112, USA http://content.csbs.utah.edu/~lozada/Re ... A_4_UU.pdf

The author constructs benchmarks for comparison, mostly with Vanguard funds, and concludes:
“…risk-averse expected-utility-maximizing consumers withdrawing funds over nine years would have preferred several of the mutual-fund alternatives over Traditional had they known the probability distributions in advance.”

Is this actionable information; e.g., buy funds instead of TIAA Traditional? Or is it just another example of 20/20 vision through the retrospectoscope?

(Edited to change "public fixed income" to "bond".)
Last edited by Trurl Klapaucius on Sat Oct 19, 2019 8:01 am, edited 1 time in total.
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Re: Composition and safety of TIAA traditional annuity

Post by ResearchMed »

Trurl Klapaucius wrote: Wed Oct 16, 2019 5:09 pm Returning to the original post, here is an interesting article regarding the composition and safety of the “public fixed income” component of TIAA’s investment portfolio:

Bonds for Retirement Saving: TIAA Traditional’s Lessons on Quality, Duration, Risk, and Gradual Withdrawals by Gabriel A. Lozada Department of Economics, University of Utah Salt Lake City, UT 84112, USA http://content.csbs.utah.edu/~lozada/Re ... A_4_UU.pdf

The author constructs benchmarks for comparison, mostly with Vanguard funds, and concludes:
“…risk-averse expected-utility-maximizing consumers withdrawing funds over nine years would have preferred several of the mutual-fund alternatives over Traditional had they known the probability distributions in advance.”

Is this actionable information; e.g., buy funds instead of TIAA Traditional? Or is it just another example of 20/20 vision through the retrospectoscope?
Here are some critical words from your quote:

"...had they known the probability distributions in advance..."

*IF* I knew in advance what was going to happen, there are probably a LOT of things I'd do differently :wink:

Also, the past 9 years since 2018 (date of article?) included one of the longest bull markets ever. And it may have started at the very bottom of the financial crisis...?
No surprise if equity mutual funds would have outperformed some relatively conservative fixed income type of holding.

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Re: Composition and safety of TIAA traditional annuity

Post by Trurl Klapaucius »

ResearchMed wrote: Wed Oct 16, 2019 6:15 pm Also, the past 9 years since 2018 (date of article?) included one of the longest bull markets ever. And it may have started at the very bottom of the financial crisis...?
No surprise if equity mutual funds would have outperformed some relatively conservative fixed income type of holding.
The article is dated December 2018. It uses data from 1987-2015.

There were no equity mutual funds included in the study. The author took great pains to match the “public fixed income” bond component of TIAA’s investment portfolio. His corresponding mutual fund portfolios are constructed from Investor share classes of Vanguard Long-term Investment Grade, High-Yield Corporate, GNMA, and Total Bond Market Index funds.

I would be very interested in hearing your analysis of the paper, given this framework.

Thanks.

(Edited to change "public fixed income" to "bond".)
Last edited by Trurl Klapaucius on Sat Oct 19, 2019 8:02 am, edited 1 time in total.
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Re: Composition and safety of TIAA traditional annuity

Post by ResearchMed »

Trurl Klapaucius wrote: Wed Oct 16, 2019 7:29 pm
ResearchMed wrote: Wed Oct 16, 2019 6:15 pm Also, the past 9 years since 2018 (date of article?) included one of the longest bull markets ever. And it may have started at the very bottom of the financial crisis...?
No surprise if equity mutual funds would have outperformed some relatively conservative fixed income type of holding.
The article is dated December 2018. It uses data from 1987-2015.

There were no equity mutual funds included in the study. The author took great pains to match the “public fixed income” component of TIAA’s investment portfolio. His corresponding mutual fund portfolios are constructed from Investor share classes of Vanguard Long-term Investment Grade, High-Yield Corporate, GNMA, and Total Bond Market Index funds.

I would be very interested in hearing your analysis of the paper, given this framework.

Thanks.
Thanks.
Obviously, I didn't study the article (or read it much at all <insert embarrassed face emoticon here>.

I'll try to take a look, and I'm sure others will as well.
But there is still the issue that you already asked about... "... another example of 20/20 vision through the retrospectoscope".
However, this is a problem that is difficult to avoid when using any historical data, so there's that issue anyway.

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Re: Composition and safety of TIAA traditional annuity

Post by oldzey »

FYI, yogibearbull (at the M* TIAA Funds forum) archives TIAA Traditional (RA, RC, RCP, SRA, & IRA) rates at the start of each month.

For example:

Oct. 1, 2019: https://community.morningstar.com/t5/TI ... td-p/24882

Sept. 1, 2019: https://community.morningstar.com/t5/TI ... td-p/20297

Aug. 1, 2019: https://community.morningstar.com/t5/TI ... td-p/15812
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Re: Composition and safety of TIAA traditional annuity

Post by Gabriel A. Lozada »

I'm the author of the article cited by Trurl Klapaucius and decided to register here in order to be able to discuss the article with those of you who are interested. I very much appreciate the interest shown in it.

ResearchMed wrote:
But there is still the issue that you already asked about... "... another example of 20/20 vision through the retrospectoscope".
However, this is a problem that is difficult to avoid when using any historical data, so there's that issue anyway.
Indeed, I do not know how to avoid this when using historical data. About the most one can do is to try to avoid using present- or future-tense statements when speaking about the past, as forum member Nisiprius has in other threads pointed out. This is the reason for adding caveats such as
"...had they known the probability distributions in advance..."
It would be inappropriate to make a blanket statement such as "consumers would have preferred [such-and-such investment]" without a caveat like that, because that would imply that there existed a known best investment action to take, and there never was because the future was unknowable. (Note, by the way, that the claim is merely that consumers knew the probability distributions, not the realized outcomes over specific time periods.)

To expand on a comment by Trurl Klapaucius, the mutual-fund and ETF portfolios to which I compared TIAA Traditional were constructed to have the same duration and credit quality as the portfolio backing TIAA Traditional (EDIT: all of the bonds, not just the publicly traded ones, as explained in footnote 9) at year-end 2015; it was not possible to get duration and quality data much earlier than that. (EDIT: Some portions of the paper also try to match the types of bond issuers, although as footnote 15 explains, that information is only available for 85.914% of the General Account's assets.) So the exercise was intended to be an apples-to-apples comparison of portfolios with durations of almost 8 years and average quality of BBB (somewhat different than the Total Bond Market funds which retirement savers often use).

Previous work emphasized how much less risky TIAA Traditional is compared to bond mutual funds and ETFs, and in the short run this is of course true: one cannot lose money with TIAA Traditional (unless TIAA were to go bankrupt, and unlikely event), while from day to day one can certainly lose money in bond mutual funds and ETFs. I however think that, if one has the version of Traditional which limits withdrawals to a 9-year period, short run risk is completely irrelevant. Section 4 of the paper develops a new measure of long-run risk, specifically risk over 9 years, and shows that the long-run risks of TIAA Traditional and of its alternatives are much closer than their short-run risks---indeed so much so that while previous work found TIAA Traditional second-order stochastically dominated bond-fund alternatives, using the long-run risk measure flips the dominance the other way.

Methodologically, then, the point is that the risk measure one uses should be appropriate to one's time horizon. One should not use daily, weekly, or monthly price fluctuations as a measure of risk if one's horizon is closer to a decade.

A minor point of the paper is that some of TIAA's recent public communications about Traditional report incorrect performance figures. This came as something of a surprise. Any mutual fund publishing wrong performance information would get in trouble with the SEC, but Traditional is an insurance product so the SEC does not regulate it (the state of New York's insurance regulators do). For more on this, see the paper's Appendix.

I welcome any more feedback on the paper!
Last edited by Gabriel A. Lozada on Fri Oct 18, 2019 5:21 pm, edited 2 times in total.
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Re: Composition and safety of TIAA traditional annuity

Post by student »

Gabriel A. Lozada wrote: Thu Oct 17, 2019 12:18 am I'm the author of the article cited by Trurl Klapaucius and decided to register here in order to be able to discuss the article with those of you who are interested. I very much appreciate the interest shown in it.
Thank you for posting. I haven't read your entire paper yet but it looks interesting. Previously, I only use http://collegeretirement.blogspot.com/2 ... -deal.html as my source of comparison.

In particular, thank you for your explanation "To expand on a comment by Trurl Klapaucius, the mutual-fund and ETF portfolios to which I compared TIAA Traditional were constructed to have the same duration and credit quality as the portfolio backing TIAA Traditional (the entire portfolio, not just the public investments) at year-end 2015. (It was not possible to get duration and quality data much earlier than that.) So the exercise was intended to be an apples-to-apples comparison of portfolios with durations of almost 8 years and average quality of BBB (somewhat different than the Total Bond Market funds which retirement savers often use)." Personally, I use TIAA Traditional almost exclusively for my non-cash portion of fixed income because I want this portion to be stable. Indeed, my alternative would be TBM. So if an investor only wants to invest in one bond fund for simplicity (bogleheads, in general, prefer simplicity), what will be a good alternative to TIAA Traditional?
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Re: Composition and safety of TIAA traditional annuity

Post by Trurl Klapaucius »

Gabriel A. Lozada wrote: Thu Oct 17, 2019 12:18 am I'm the author of the article...
Welcome to the forum, and congratulations on writing such a fascinating paper! Your paper does a lot, probably more than any, to pierce the veil of mystery (cult of personality?) surrounding TIAA’s investment magic. I found the description of how you developed the models in Section 2 very interesting. Your choice to use a pseudo-nine-year withdrawal period to assess the comparative risk of the mutual fund portfolios is trenchant.

Thank you for clarifying that the mutual fund and ETF portfolios in your paper were constructed to match the General Account’s entire portfolio, not just the public fixed income investments as I mistakenly assumed; but, at the risk of being overly nitpicky, footnote 15 on page 12 indicates that you only matched to 85.914% of the General Account’s holdings, and that the remaining 14% was omitted.

On a personal (non-stochastically dominant) note, I’m surprised that TIAA is rated AA+ when the holdings of its General Account are rated BBB. Psychologically, when I invest in TIAA Traditional, I imagine that I am getting a AA+ rated fixed income product, not a basket of BBB rated products. Is this like investing in a AAA rated collateralized mortgage obligation in 2007, only to find a bunch of sub-prime mortgages under the hood when you bring it home?
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Re: Composition and safety of TIAA traditional annuity

Post by student »

Trurl Klapaucius wrote: Thu Oct 17, 2019 9:19 am
Gabriel A. Lozada wrote: Thu Oct 17, 2019 12:18 am I'm the author of the article...
Welcome to the forum, and congratulations on writing such a fascinating paper! Your paper does a lot, probably more than any, to pierce the veil of mystery (cult of personality?) surrounding TIAA’s investment magic. I found the description of how you developed the models in Section 2 very interesting. Your choice to use a pseudo-nine-year withdrawal period to assess the comparative risk of the mutual fund portfolios is trenchant.

Thank you for clarifying that the mutual fund and ETF portfolios in your paper were constructed to match the General Account’s entire portfolio, not just the public fixed income investments as I mistakenly assumed; but, at the risk of being overly nitpicky, footnote 15 on page 12 indicates that you only matched to 85.914% of the General Account’s holdings, and that the remaining 14% was omitted.

On a personal (non-stochastically dominant) note, I’m surprised that TIAA is rated AA+ when the holdings of its General Account are rated BBB. Psychologically, when I invest in TIAA Traditional, I imagine that I am getting a AA+ rated fixed income product, not a basket of BBB rated products. Is this like investing in a AAA rated collateralized mortgage obligation in 2007, only to find a bunch of sub-prime mortgages under the hood when you bring it home?
Looking at this file, it looks like the "weighted average" is tilted towards A rather than BBB. https://www.tiaa.org/public/pdf/perform ... rength.pdf Regarding the rating, I wonder whether the surplus of 38.8B has anything to do with it.
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Re: Composition and safety of TIAA traditional annuity

Post by Gabriel A. Lozada »

student wrote: Thu Oct 17, 2019 6:31 am Previously, I only use http://collegeretirement.blogspot.com/2 ... -deal.html as my source of comparison.
Yes, that web page, posted in 2011 by Prof. Tomas Dvorak, has very useful information. I was only able to do a more in-depth analysis by building upon the results of some post-2011 papers (Babbel et al. 2015, and Goodman and Richardson 2014) whose authors were given access by TIAA to vintage-by-vintage performance histories which might have been more detailed than what TIAA gave to Prof. Dvorak. (I did not get any data directly from TIAA; I am not affiliated them or any other investment provider.) Also, note that Prof. Dvorak compares Traditional's performance "against Vanguard Total Bond Index Fund (VBMFX) and Fidelity U.S. Bond Index Fund (FBIDX)," while I used a duration- and quality-matched comparison.

This raises student's important question:
So if an investor only wants to invest in one bond fund for simplicity (bogleheads, in general, prefer simplicity), what will be a good alternative to TIAA Traditional?
When I last looked at this question, in 2016, I only looked at Vanguard funds because low expenses are very important for bond funds and Vanguard is well-known for their low expenses. By now, there may be other low-expense options from other providers, particularly in the ETF space. Since there was no Vanguard fund which exactly matched the TIAA General Account's quality and duration, one has to decide how to trade off mismatches of quality and of duration. If one does this using the "distance" measure of my paper's equation (1), then Vanguard's Intermediate-Term Corporate Bond Index Fund was the closest single Vanguard fund to the TIAA General Account (in 2016). However, if one also wishes to consider matching the bond types of the portfolio, a corporate bond fund is not a good choice because about 1/3 of the TIAA General Account is invested in mortgages. In order to try to match quality, duration, and portfolio composition, the Total Bond Market Fund was the closest.

Alternatives to Traditional consisting of two funds, not one, are discussed in Tables 3 and 4 of the paper, under the columns "2m" and "2t" for Table 3, and "2M" and "2T" for Table 4. Those tables also report several measures of the "distance" between those combinations and the portfolio backing Traditional. "2m" is 44% Vanguard Long-Term Investment Grade Fund/56% Vanguard GNMA Fund, "2t" is 22% Vanguard Long-Term Investment Grade Fund/78% Vanguard Total Bond Market Index Fund, "2M" is 41% Vanguard Long-Term Corporate Bond ETF/59% Vanguard Mortgage-Backed Securities ETF, and "2T" is 21% Vanguard Long-Term Corporate Bond ETF/79% Vanguard Total Bond Market ETF.

As Figure 2 of the paper shows, the short-term riskiness of these alternatives was much larger than the short-term riskiness of Traditional, but as Figure 3 shows, for withdrawals stretched out over 9 years, the alternatives fluctuated only modestly more than Traditional, and most of that fluctuation reflected better-than-Traditional performance. Figure 3 also graphs the Total Bond Market Index Fund for comparison.

I hope this helps answer the question.
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Re: Composition and safety of TIAA traditional annuity

Post by student »

Gabriel A. Lozada wrote: Thu Oct 17, 2019 9:46 am ...
Thank you so much for answering my question.
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Re: Composition and safety of TIAA traditional annuity

Post by Gabriel A. Lozada »

Trurl Klapaucius wrote: Thu Oct 17, 2019 9:19 am
Gabriel A. Lozada wrote: Thu Oct 17, 2019 12:18 am I'm the author of the article...
Welcome to the forum, and congratulations on writing such a fascinating paper! Your paper does a lot, probably more than any, to pierce the veil of mystery (cult of personality?) surrounding TIAA’s investment magic. I found the description of how you developed the models in Section 2 very interesting. Your choice to use a pseudo-nine-year withdrawal period to assess the comparative risk of the mutual fund portfolios is trenchant.

Thank you for clarifying that the mutual fund and ETF portfolios in your paper were constructed to match the General Account’s entire portfolio, not just the public fixed income investments as I mistakenly assumed; but, at the risk of being overly nitpicky, footnote 15 on page 12 indicates that you only matched to 85.914% of the General Account’s holdings, and that the remaining 14% was omitted.

On a personal (non-stochastically dominant) note, I’m surprised that TIAA is rated AA+ when the holdings of its General Account are rated BBB. Psychologically, when I invest in TIAA Traditional, I imagine that I am getting a AA+ rated fixed income product, not a basket of BBB rated products. Is this like investing in a AAA rated collateralized mortgage obligation in 2007, only to find a bunch of sub-prime mortgages under the hood when you bring it home?
Thank you very much for your comments. You are absolutely right about my portfolios only matching 85.914% of the General Account's holdings, not 100%. I apologize for my misstatement and I'll try to edit that post.

I conjecture that a rating agency can give TIAA a rating of AA+ despite the holdings of its General Account averaging BBB because of the diversification of the General Account (loosely speaking, the bonds won't all go bad at the same time). I also conjecture that most of what the General Account holds are traditional, well-understood instruments, so the rating agencies understand them much better than the rating agencies understood (or "cared to understand"?) tranches of collateralized mortgage obligations in 2007. However, I am not an expert on credit rating agencies and cannot speak authoritatively to the question.
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Re: Composition and safety of TIAA traditional annuity

Post by Gabriel A. Lozada »

student wrote: Thu Oct 17, 2019 9:32 am Looking at this file, it looks like the "weighted average" is tilted towards A rather than BBB. https://www.tiaa.org/public/pdf/perform ... rength.pdf Regarding the rating, I wonder whether the surplus of 38.8B has anything to do with it.
It is non-trivial to calculate an average bond quality rating using a percentage breakdown by quality because of the highly nonlinear relationship between quality ratings and default rates. As illustrated in Table 1 of my paper, it's best to translate each bond quality letter rating into a "loss rate," then average the loss rates, then translate the average loss rate back into a bond quality letter rating. (The difference between the bond quality scale used by the insurance industry, the NAIC scale, and the scale used by credit rating agencies Moody, S&P, and Fitch does not make things easier.)

The nonlinearity between bond quality ratings and loss rates is illustrated in the top and bottom axes of Figure 1 of the paper, where the top axis gives the bond quality ratings (AAA, AA, etc.) and the bottom axis gives the corresponding figure for "one minus the five-year cumulative loss ratio." For example, the gap between BBB and A bonds is considerably larger than the gap between A bonds and AA bonds.

Since I have no reason to believe that the 38.8B surplus was not included in the TIAA General Account Annual Statement's portfolio quality breakdowns which I used to calculate TIAA's quality, I think it's the bond quality rating nonlinearity, rather than the surplus, which accounts for the overall quality rating of TIAA.

Thank you for your continued interest in the paper!
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Re: Composition and safety of TIAA traditional annuity

Post by student »

Gabriel A. Lozada wrote: Thu Oct 17, 2019 10:31 am
student wrote: Thu Oct 17, 2019 9:32 am Looking at this file, it looks like the "weighted average" is tilted towards A rather than BBB. https://www.tiaa.org/public/pdf/perform ... rength.pdf Regarding the rating, I wonder whether the surplus of 38.8B has anything to do with it.
It is non-trivial to calculate an average bond quality rating using a percentage breakdown by quality because of the highly nonlinear relationship between quality ratings and default rates. As illustrated in Table 1 of my paper, it's best to translate each bond quality letter rating into a "loss rate," then average the loss rates, then translate the average loss rate back into a bond quality letter rating. (The difference between the bond quality scale used by the insurance industry, the NAIC scale, and the scale used by credit rating agencies Moody, S&P, and Fitch does not make things easier.)

The nonlinearity between bond quality ratings and loss rates is illustrated in the top and bottom axes of Figure 1 of the paper, where the top axis gives the bond quality ratings (AAA, AA, etc.) and the bottom axis gives the corresponding figure for "one minus the five-year cumulative loss ratio." For example, the gap between BBB and A bonds is considerably larger than the gap between A bonds and AA bonds.

Since I have no reason to believe that the 38.8B surplus was not included in the TIAA General Account Annual Statement's portfolio quality breakdowns which I used to calculate TIAA's quality, I think it's the bond quality rating nonlinearity, rather than the surplus, which accounts for the overall quality rating of TIAA.

Thank you for your continued interest in the paper!
I understand the non-trivial nature in computing the rating, that's why I put weighted average in quotes. Thank you again for the explanation as it is very helpful. I will spend more time reading your paper later as far I have only took a quick look. Also thank you for the explanation of the overall quality rating of TIAA.
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Re: Composition and safety of TIAA traditional annuity

Post by Trurl Klapaucius »

student wrote: Thu Oct 17, 2019 9:32 am Looking at this file, it looks like the "weighted average" is tilted towards A rather than BBB.
The problem is, you can’t simply look at the list of ratings and estimate their weighted average. This is because, as pointed out on pages 5-6 of Lozada’s paper, “there is no meaningful way in which the difference between the first rating and the second is the same as the difference between the second rating and the third”. In other words, when glancing at the ratings table, it is all too easy to make the incorrect assumption that the equally spaced rating steps each represent an equal amount of risk; but they don’t. As Lozada points out, “Moody’s Investors Service (2011, Exhibit 23) gives the following average cumulative five-year loss rates: Aaa, 0.02%; Aa, 0.18%; A, 0.49%; Baa, 1.19%; Ba, 6.90%; B, 15.57%; Caa–C, 35.08%” You actually have to crunch the numbers to get the weighted average.

When I attempt to do this calculation using the numbers given in the TIAA General Account statement of June 30, 2019 that you reference, and using “one minus the five-year loss rate” as the measure of credit quality (but otherwise taking some hopefully-not-too-egregious liberties with the method presented by Lozada in Table 1 of his paper), I come up with a weighted average credit quality of 0.969, which corresponds to a loss rate of 1 – 0.969 = 0.031, which is between that of BBB (1.19%) and BB (6.90%).

Code: Select all

Bond	Moody's 	Credit Quality		Holdings	Weighted
Rating	5-year		(1 minus 5-year 	reported	Credit
	loss rate	loss rate)		6/30/2019	Quality

Treasury0.00%		1.0000			7.85%		0.0785
Agency	0.00%		1.0000			1.91%		0.0191
AAA	0.02%		0.9998			6.00%		0.0600
AA	0.18%		0.9982			8.96%		0.0894
A	0.49%		0.9951			34.13%		0.3396
BBB	1.19%		0.9881			29.14%		0.2879
BB	6.90%		0.9310			5.62%		0.0523
B	15.57%		0.8443			4.12%		0.0348
Below B	35.08%		0.6492			1.12%		0.0073
NR	na		na			1.15%		na
				
Weighted average credit quality:				0.9690
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Re: Composition and safety of TIAA traditional annuity

Post by Trurl Klapaucius »

Gabriel A. Lozada wrote: Thu Oct 17, 2019 12:18 am I welcome any more feedback on the paper!
If you don’t mind fielding a tangential question, after reviewing the 2015 holdings of TIAA’s General Account can you explain why 2.474% was in municipal bonds? From the June 30, 2019 statement the municipal bond holding is even higher; 11,745/263,960 = 4.45% Holding tax-exempt muni bonds in a retirement account is generally considered bad form. Unless they are saying that they are holding almost $12 billion of taxable private-activity municipal bonds; but is that even possible?
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Re: Composition and safety of TIAA traditional annuity

Post by student »

Trurl Klapaucius wrote: Thu Oct 17, 2019 12:16 pm
student wrote: Thu Oct 17, 2019 9:32 am Looking at this file, it looks like the "weighted average" is tilted towards A rather than BBB.
The problem is, you can’t simply look at the list of ratings and estimate their weighted average. This is because, as pointed out on pages 5-6 of Lozada’s paper, “there is no meaningful way in which the difference between the first rating and the second is the same as the difference between the second rating and the third”. In other words, when glancing at the ratings table, it is all too easy to make the incorrect assumption that the equally spaced rating steps each represent an equal amount of risk; but they don’t. As Lozada points out, “Moody’s Investors Service (2011, Exhibit 23) gives the following average cumulative five-year loss rates: Aaa, 0.02%; Aa, 0.18%; A, 0.49%; Baa, 1.19%; Ba, 6.90%; B, 15.57%; Caa–C, 35.08%” You actually have to crunch the numbers to get the weighted average.

When I attempt to do this calculation using the numbers given in the TIAA General Account statement of June 30, 2019 that you reference, and using “one minus the five-year loss rate” as the measure of credit quality (but otherwise taking some hopefully-not-too-egregious liberties with the method presented by Lozada in Table 1 of his paper), I come up with a weighted average credit quality of 0.969, which corresponds to a loss rate of 1 – 0.969 = 0.031, which is between that of BBB (1.19%) and BB (6.90%).
Thanks for the explanation, I know there is no good way to find "averages." I only did a quick glance at the percentages and trimmed off the ends and see that most are A and BBB with more in A. That's why I put quotes in weighted average. Essentially I am saying that there more investments in A or above. But I agree that your analysis is better since you have pointed out the distance issues.
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Re: Composition and safety of TIAA traditional annuity

Post by Northern Flicker »

If you look at the underlying portfolio, build the rest of your asset allocation as if you were holding shares of a mutual fund with that portfolio. If TIAA actually defaulted on its obligations, all the beneficiaries of products funded by the portfolio would have claims settled against the assets.

Being an insurance contract, it is going to be audited/reviewed annually for financial accuracy and for actuarial adequacy. Problems are not going to gradually build up for years and then suddenly it is unexpectedly broken.

The treasury security allocation in the TIAA portfolio was a bit lower than in a total US bond index the last time I looked at it. Tail risk of TIAA Trad thus is probably slightly higher than total bond, but garden variety risk is lower because TIAA normally absorbs term risk and credit risk in return for lower liquidity.
Risk is not a guarantor of return.
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Re: Composition and safety of TIAA traditional annuity

Post by Gabriel A. Lozada »

Trurl Klapaucius wrote: Thu Oct 17, 2019 12:16 pm[...] I come up with a weighted average credit quality of 0.969, which corresponds to a loss rate of 1 – 0.969 = 0.031, which is between that of BBB (1.19%) and BB (6.90%).
It's hard to know what to do with the NR ("not rated") bonds. One perfectly reasonable strategy is the one Trurl Klapaucius takes, which is to ignore them. However, technically, then the 0.9690 sum of the "weighted credit quality" only represents the quality of 100% - 1.15% = 98.85% of the holdings, so the average credit quality of that 98.85% of the holdings is 0.9690/.9885 = 0.9803 (actually, 0.9802 with no intermediate roundings). That's still between BBB and BB, closer to BBB than 0.9690 was, but not as close as the year-end 2015 portfolio was. Only if one were to assume a 100% loss rate on NR bonds would the average credit quality be as low as 0.9690.

Such technical details aside, we've learned from Trurl Klapaucius is that TIAA's General Account quality is somewhat worse now than it was at year-end 2015.
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Re: Composition and safety of TIAA traditional annuity

Post by Gabriel A. Lozada »

Trurl Klapaucius wrote: Thu Oct 17, 2019 1:18 pm If you don’t mind fielding a tangential question, after reviewing the 2015 holdings of TIAA’s General Account can you explain why 2.474% was in municipal bonds? From the June 30, 2019 statement the municipal bond holding is even higher; 11,745/263,960 = 4.45% Holding tax-exempt muni bonds in a retirement account is generally considered bad form. Unless they are saying that they are holding almost $12 billion of taxable private-activity municipal bonds; but is that even possible?
I am not sure what the answer is. I did find a Summer 2018 publication from Fidelity entitled "Overview of the Taxable Municipal Market"
(https://www.fidelity.com/bin-public/060 ... r-2018.pdf) which says on p. 7: "The total size of the municipal market is approximately $3.8 trillion, 71% of which is tax exempt. Municipal bonds where the interest is federally taxable as ordinary income comprise approximately $473 billion, or 12% of the total. The remaining 17%, or $625 billion, represents private activity bonds where the interest is subject to the Alternative Minimum Tax for individuals." Based on this, it is certainly possible that TIAA's General Account holds almost $12 billion of taxable municipal bonds.
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Re: Composition and safety of TIAA traditional annuity

Post by student »

Gabriel A. Lozada wrote: Thu Oct 17, 2019 2:36 pm Such technical details aside, we've learned from Trurl Klapaucius is that TIAA's General Account quality is somewhat worse now than it was at year-end 2015.
I wonder whether this is due to the low interest rate environment. Since TIAA has contractual obligations to credit TIAA Traditional participants with at least 3% crediting rate, it has to find the yield somewhere.
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