TIAA may be pushing unsuitable products, whistleblowers say

New York Times reports reps may have incentive to push higher-fee managed accounts.

This story has been updated to include a statement from TIAA.

In attempts to become more like other financial powerhouses, the retirement-plan giant TIAA might be violating its fiduciary duty by pushing customers into unsuitable products that generate higher fees.

Those charges come from several legal filings noted in a major article in The New York Times on Sunday about the company once known as the Teachers Insurance and Annuity Association.

Now known simply as TIAA, the company was founded as a nonprofit in 1918 with a $1 million donation by the Carnegie Foundation so that “teachers could retire with dignity.”

In 1952, it added the College Retirement Equity Fund and became TIAA-CREF. It continues to serve the employees of some 15,000 colleges, hospitals and other nonprofit organizations.

(More: 401(k) DCIOs: Some are folding, holding and doubling down.)

In 1997, Congress took away the company’s nonprofit status as part of a tax reform bill, saying that TIAA had an unfair advantage over other financial companies. The shift sparked changes at the retirement giant, including the hiring of longtime Merrill Lynch executive Herbert M. Allison Jr. as CEO in 2002.

TIAA set up a registered investment advisory firm in 2004 that began offering private asset management services, in hopes of mitigating outflows to other financial firms when plan participants stopped working and could rollover their account balances. In 2005 it began providing managed accounts for a fee.

According to the Times story, the costs of these accounts were high compared to TIAA’s basic retirement accounts. So was the pressure to sell them, according to the whistleblower complaint. It notes that TIAA levied fees of 0.75% to 1.15% of assets under management, on top of the costs associated with TIAA funds or annuities.

(More: TIAA launches robo-adviser with access to SRI funds.)

People who previously worked there say pressure to sell climbed at TIAA after it started losing institutional accounts such as universities, according to the story.

TIAA focuses exclusively on meeting our clients’ long-term financial needs. We always put our clients first and operate in a highly transparent and ethical way.

“The outcomes we deliver for our clients speak volumes,” wrote TIAA spokesman Chad Peterson in a statement provided to InvestmentNews. “We’ve paid more than the guaranteed payouts to our fixed annuity holders every year for more than half a century. We’ve paid $394 billion in benefits to retired participants since 1918. In fact, since our founding, our retired participants have never missed a payout from us, through depressions, wars, and natural disasters.”

Although TIAA contends that its sales representatives are not paid commissions, it awards bonuses to financial consultants and advisers if they sell in-house products or services.

As a result, according to former employees cited in the article, sales representatives have incentive to tell school faculty and staff on the cusp of retirement that they should transfer funds from institutional plans – where annual costs may be about 0.3% of assets under management – into managed accounts with fees ranging from 0.7% to 1.0%.