TIAA

LarryH

Should a traditional TIAA account be part of an asset allocation portfolio?

The traditional TIAA (Teachers Insurance and Annuity Association) is only funded from contributions to a 403b. (Other versions of TIAA are available, but they do not pay as much interest.) Upon retirement one cannot buy additional amounts and can only withdraw money in one of three ways:

Convert to an immediate (single premium) annuity.
Ten substantially equal yearly withdrawals over ten years.
Withdraw yearly Required Minimum Distributions. This is the option I have chosen.

Because I cannot buy or sell into this account, I have come to the conclusion that the TIAA account should NOT be included in the calculations involving an asset allocation portfolio. My TIAA account would be about 1/3 of of my total portfolio.

I would appreciate any thoughts on this matter.

Larry

msf

I respectfully disagree. Consider the purposes of asset allocation. Diversification for stability (why?) and risk reduction (what risks?), a roadmap for drawdown (draw first from cash, don't anticipate using bond investments in less than five years, equities in less than 10), etc.

For people not familiar with TIAA annuities, the traditional account is essentially a GIC that pays a very handsome rate of return, with restrictions on withdrawals (as Larry outlined) typical of GICs. Because of those restrictions, it can't be used in quite the same way as cash would in drawing down assets. That's an argument for viewing a portion of the balance as bonds - perhaps as much as half. I arrive at that based on the ability to access 1/2 in the five year period one would use cash for, and 1/2 in the five year period one would be using bonds for. (Again, thinking of cash as what's used in years 0-5, bonds in years 5-10.)

The traditional account still provides the stability of cash - for the purpose of sleeping well at night. It is still reducing the risk of having to sell equities down the road when the market has taken a nosedive - you've got a cash flow to draw on to avoid that problem.

Thus I might go so far as to attribute a portion of the account to bonds, and a portion to cash, but not to ignore the account altogether.

LarryH

Reply to @msf:

Thanks for your comment. My major concern is another dip to our recession such that I would need to sell bonds and buy equities to rebalance the portfolio. Currently the TIAA is 31% of my total portfolio. Thus there is the possibility I would not be able to liquidate sufficient bonds to buy equities. I cannot liquidate any TIAA as I have contracted to withdraw the Required Minimum Distribution (RMD). The RMD goes to a rainy day fund, but I find it rains all too frequently. If I were to go ahead with my plan to ignore the TIAA, I would be invested with 34% equities and 53% bonds (including the TIAA). In retirement at age 75, this might not be unreasonable.

Larry

BobC

We would absolute include the traditional TIAA in your overall asset allocation. The fact that you cannot move it to something else and that you can only access it over a period of years (or life) means it is permanent. We would look at it something like a fixed annuity, not quite a pension source, but in the steady, boring cash/bond sector. If your remaining assets need to be more aggressively invested to meet your risk/reward profile, so be it. However, if that makes you uncomfortable, you should re-think your risk tolerance.

VintageFreak

I think TIAA is like Facebook. It's there in your face, but secretly you want it to dissappear / go bankrupt. Since losing their "tax exempt" status, they are not the same company.

msf

There were two immediate effects of Congress enacting a law that stripped TIAA-CREF of its tax-exempt status:

1. TIAA-CREF's "profits" were reduced. Since it did (and continues to) operate without shareholders, all profits go back to the policy holders (including TIAA traditional annuity holders). Much the same way Vanguard operates, and the same way mutual insurance companies operate. So, there was a slight reduction in the amount of dividends paid to policy holders.

2. It was freed of restrictions that barred it from offering policies directly to 403(b) participants (previously, they could only be offered indirectly, via institutions like colleges). So it was able to offer products to the general public, like mutual funds, post-tax annuities, etc. While many of these new products have not been especially successful, this does not seem to have had any impact on their traditional business line.

TIAA-CREF remains one of only three insurance companies with the top rating from S&P, Fitch, Moody's, and AM Best. That's important when dealing with fixed income investments (or living benefits, or ...) with insurance companies. (It is also licensed in all fifty states, including New York - no hiding behind a separate subsidiary; I'll let the insurance wonks explain why that's significant.) And despite this conservative bent, despite being taxed on profits, it still pays a very handsome rate on its traditional annuity.

Here's an article on the safety of TIAA-CREF: http://chronicle.com/article/Is-TIAA-CREF-Safe-/44807 (Chronicle of Higher Ed)
A NYTimes article from 2000 talking about TIAA-CREF reinventing itself once freed from its marketing restrictions (see #2, above): http://www.mindfully.org/Reform/TIAA-CREF.htm
And what's essentially TIAA-CREF's press release in 1997 about losing their tax exempt status (and the impact on benefits to policy holders (see #1, above): http://www.virginia.edu/insideuva/textonlyarchive/97-09-19/3.txt

The withdrawal restriction that Larry wrote about has been around, I believe, for decades. While it may be more stringent than the norm, the norm for stable value components of annuities is nevertheless to restrict withdrawals in various ways.

VintageFreak

It's not just profits that were reduced. I think when TIAA-CREF was forced to enter "retail" market, read "taxable" market it was a challenge. When you are managing money in retirement accounts you don't have to worry too much about your clients paying taxes. You are much more inclined to pull the trigger. Something you can't do otherwise when you are not really beating the market and potential generate too much capital gains for shareholders.

LarryH

Thanks to all who responded with comments.

Reviewing the comments I have come to the conclusion that I must include the TIAA as part of my Bond Asset Class. I made some rough calculations as follows:

First I reviewed five target date funds appropriate to a person who retired in 2006. The asset categories averaged out to:

42.96% in Bonds
45.07% in Stocks (Domestic and International)
10.99% in Cash

Because I thought Fidelity's allocation of 29% to cash was excessive, I allocated 10% each to both stocks and bonds leaving 9% in Fidelity's cash position. After fudging a bit to account for an "Other" category, etc., the results are:

44.29% in Bonds
47.72% in Stocks
7.99% in Cash

I next used the following criteria for creating my allocations:

1. Allocation categories: Bonds, Domestic Stock, International Stock, Inflation Protection, and Cash.
2. Include TIAA (31% of my total portfolio) in asset calculations.
3. The TIAA cannot be sold or additional amounts added in a rebalance calculation.
4. The total of Cash and Bonds, excluding TIAA, should be at least 25% of Stocks.
5. The Stock allocation should equal or exceed the Bond allocation.

Using the above as guidelines and reducing stock and bond allocations to make room for an "Inflation Protection" category, the end result is:

39.5% in Bonds
42.5% in Stocks
10.0% in Inflation Protection
8.0% in Cash

Excluding TIAA, the amounts of available bonds and cash are almost 38% of stocks. In case of a second dip recession, I want a sufficient buffer of money to rebalance my stock allocation. I did a rough calculation assuming a 30% reduction in Stocks and Inflation assets, leaving Bonds and Cash at the same values. There were sufficient Cash and Bonds available to completely rebalance to new values and still have an excess in bonds greater than the value of the TIAA.

Given I am retired, the above allocations appear appropriate and will allow me to sleep nights.

Larry