If you’ve ever opened your TIAA statement and felt a bit perplexed, you’re not alone. As a former TIAA advisor who specializes in the serving the higher education community, I’ve assisted many smart people who similarly struggled to make sense of TIAA’s complexity.
In this post, I aim to demystify TIAA’s structure by breaking it down into 7 distinct layers. We will start with the broadest layer (TIAA itself) and work our way down to the most specific (the individual investments available to you in your TIAA contracts).
Let’s dive in.
Layer 1: TIAA (the plan administrator)
We begin with TIAA itself. TIAA—which, in case you ever wondered, stands for “Teachers Insurance and Annuity Association”—is known as a “plan administrator”. They are the company your employer has hired to manage the day-to-day operations of its retirement plans.
If your employer has chosen TIAA as its plan administrator, chances are you’re going to have to do business with them whether you like it or not. I’ve encountered universities that offer participants (that’s you: the person with the retirement account) the choice between two plan administrators, but this is the exception, not the rule.
Not to worry though. If your employer has chosen TIAA, it was for good reason. TIAA has been a trusted partner for universities, hospital systems, and other large nonprofits for over 100 years.
This brings us to layer two.
Layer 2: Your employer (the plan sponsor)
The specific university, hospital system, or other nonprofit organization you work for is known as the “plan sponsor”. TIAA serves as the plan administrator for thousands of plan sponsors throughout the US.
The plan sponsor is responsible for designing its retirement plans to fit the unique needs of the organization and its employees. It is also responsible for oversight of the plan administrator and ongoing due diligence.
Layer 3: Retirement Plan(s)
Retirement plans are tax-advantaged accounts that employees can use to save for retirement. 403(b)s, which are roughly the nonprofit equivalent of 401(k) plans in for-profit businesses, are the most common type of retirement plan utilized by universities and other non-profit institutions, but there are other types of plans designed to serve specific functions.
It’s important to recognize that each type of plan will come along with its own rules and idiosyncrasies. I live in Chicago and serve a number of clients from the University of Chicago, so let’s look at their plans as an example.
The University of Chicago offers three 403(b) plans:
- The Staff Employee Retirement Income Plan (ERIP), a mandatory retirement plan for staff (not faculty) who have attained 21 years of age and completed 1,000 hours of service. The university contributes an automatic 4% of compensation to this account and requires participants to contribute another 3%.
- The Contributory Retirement Plan (CRP), a mandatory retirement plan for faculty (not staff) and other academic appointees. The university contributes an automatic 8% of compensation to this account and requires participants to contribute another 5%.
- The Supplemental Retirement Program (SRP), an optional plan for participants who wish to save more for retirements than the ERIP or CRP will allow.
The university also offers a 457(b) deferred compensation for highly compensated employees who are already contributing the IRS-permitted maximum to the SRP and wish to save more for retirement.
Layer 4: Contracts
Here’s where things start to get interesting and a bit complex.
You can think of contracts as the sub-accounts of your retirement plans. Each retirement plan will have at least one contract type and often two or three. It’s also possible that each contract type will offer its own unique investment lineup (more on this later).
There are six contract types at TIAA:
- Retirement Annuity (RA)
- Group Retirement Annuity (GRA)
- Retirement Choice (RC)
- Supplemental Retirement Annuity (SRA)
- Group Supplemental Retirement Annuity (GSRA)
- Retirement Choice Plus (RCP)
The most important difference between the contracts is their respective rules around TIAA Traditional, TIAA’s flagship fixed annuity.
There are two primary ways in which the rules around TIAA Traditional vary by contract type: liquidity and the guaranteed interest rate. It’s worth noting that while TIAA does guarantee a minimum interest rate on TIAA Traditional, this is dependent on their claims-paying ability, which itself depends on the sustainability and financial strength of TIAA’s “General Account”. You can read more about the financial strength of the General Account here.
Regardless of contract type, TIAA Traditional offers a minimum interest rate during the accumulation phase. The guaranteed minimum interest rate in GRA, RA, SRA, and GSRA contracts is 3%, whereas RC and RCP contracts offer a minimum interest rate of 1–3%. It’s important to note that the actual interest rate you receive on TIAA Traditional is correlated to the broader interest rate environment and thus may be higher than the guaranteed minimums.
When it comes time to withdraw your funds, all contract types allow you to convert all or a portion of your TIAA Traditional Balance into fixed monthly payments for the rest of your life. This option is known as annuitization. Once you annuitize, you should be prepared for the amount of your payments to remain the same for the rest of your life, though TIAA has been known to increase payments for annuitants when they are able to do so.
What if you aren’t interested in annuitizing?
In that case, SRA, GSRA, and RCP contracts are the most flexible, as the participant can withdraw or transfer their TIAA Traditional balances whenever they choose.
RA, GRA, and RC contracts are less flexible. Participants who wish to access their TIAA Traditional balances in these contracts must do so via periodic payments spread over 7 years (RC) or 9 years (RA and GRA). In certain cases, lump sum payments are available but come with a 2.5 % surrender charge.
TIAA Traditional offers many appealing benefits and can be a great way to supplement other guaranteed income streams, such as Social Security and pensions, but it is essential to understand how it operates in a given contract before contributing to it.
Layer 5: Investment Type
Within each contract, you will typically find three types of investments: the TIAA Traditional fixed annuity (mentioned previously), a range of variable annuities, and mutual funds.
Similar to TIAA Traditional, any of the variable annuities can be annuitized at retirement, though the income stream will vary depending on the performance of the underlying investment (hence the term variable annuity). It’s worth noting that none of the variable annuities have liquidity restrictions.
Mutual funds are investment vehicles consisting primarily of stocks, bonds, or a mix of the two. Fun fact: there are over 10,000 mutual funds in the US alone (Investopedia). Your plan sponsor will typically choose about 10–20 of these to include as available options within your retirement plan.
Layer 6: Investment Category
Both the mutual funds and variable annuities available within your plan are likely to come in four categories: stock-only, bond-only, blended (a mix of stocks and bonds), and “other” (typically real estate-related investments).
Layer 7: Specific Investments
We’ve already discussed one of the specific investments that is likely available in your contracts: TIAA Traditional, the fixed annuity.
TIAA’s variable annuities include TIAA Real Estate (which offers direct investment in commercial real estate), four stock-based annuities (CREF Equity Index, CREF Stock, CREF Global Equities, CREF Growth), two bond-based annuities (CREF Inflation-linked Bond and CREF Core Bond), one annuity that is a blend of stocks and bonds designed around ESG principles (CREF Social Choice), and one money market annuity (CREF Money Market). By the way, “CREF” is an acronym for “College Retirement Equities Fund.” Until recently, the company was commonly known as “TIAA-CREF,” but in 2016, they rebranded as simply “TIAA.”
Mutual fund options will vary significantly from plan to plan. Generally speaking, your plan sponsor will provide you with sufficient options to build a well-diversified portfolio that aligns with your risk tolerance.
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By now, I hope you have achieved an understanding of TIAA’s unique structure.
Of course, this understanding is just the beginning. Many questions remain, such as:
- How should I allocate my TIAA assets, and how should this change over time?
- Should I invest in TIAA Traditional? And if so, does it make more sense to utilize the liquid or illiquid version?
- Does annuitization make sense for me? What factors should I be considering?
While it is beyond the scope of this article to give these questions the attention they deserve, I plan to explore each one of them in detail in upcoming posts. Stay tuned!
If you have any questions or are interested in working together, I’d love to connect for a Zoom call. Here is a link to schedule that conversation when you’re ready.
