Brian Taylor

October 04, 2011

If you are lucky enough to have just arrived on a campus in a full-time academic position, it's time to start making sense of the glossy investment brochures provided by TIAA-CREF. And this concerns you, too, if you're an adjunct or a staff employee, are permitted to contribute to a plan, and can afford to put any bit of income toward retirement (and every bit helps).

Either way, the retirement choices you face need not be bewildering.

To understand TIAA-CREF's offerings, first understand what it is: Whatever the prominence of the words Teachers and College in its unpacked acronym, TIAA-CREF is simply a giant insurance company. Pennywise wrote about TIAA-CREF once before, in a column that appeared at the height of the financial crisis entitled, "Is TIAA-CREF Safe?" Personally, I find that article has held up fairly well and may be reassuring today, in our renewed mood of uncertainty. New readers might want to take a look at it.

TIAA-CREF has weathered the Great Recession well. Today the company ranks 87th on the Fortune 500 list, with $32-billion in revenues and $1.4-billion in annual profits. All four ratings agencies still give the company the highest possible rating for financial stability; at this point, its ratings are better than the federal government's. A leading investing Web site calls the company the strongest annuity insurer in the United States.

As for your specific TIAA-CREF investing options, your university's human-resources department can choose from a smorgasbord, so plans will differ. Almost certainly your college's plan has annuities at its core. Those are, for the most part, variable annuities, meaning their value and rates of return fluctuate along with financial markets, functioning much like mutual funds in the accumulation phase—the stretch of life in which you amass your holdings. Once you reach the drawdown phase, however, those vehicles offer the ability either to take out your pile of money in a lump sum or to annuitize it, meaning convert it into a steady stream of annual (hence the name "annuity") income that will last the rest of your life.

You may notice annuities getting bad press from time to time because the ones sold by many insurers come wrapped in a lot of hidden fees and are sold by advisers seeking commissions. TIAA-CREF's annuities are in a different category; they are relatively low-cost, the company's consultants get no commissions, and the criticisms don't really apply (one exception noted at the end of this column).

Here's how not to invest with TIAA-CREF: Don't—after looking at the 10-year returns of the different options—put your money heavily into the ones that have performed best. Ten years from now something else may have outperformed them. The funds that have done well recently are probably the most expensive right now, but nobody can be sure.

Instead, consider your household portfolio as a whole. Seek a well-diversified mix of different types of investments that rely on returns from different sectors of the economy. Understand how each option functions and spread your money around in proportions that make sense for your relative sense of risk.

Your plan is likely to include the following:

TIAA Traditional Annuity. From your point of view, this account works a bit like a bank certificate of deposit with a very generous interest rate. TIAA-CREF guarantees that any money you put in will be returned. The company then pays a specific rate of interest (currently 3.75 percent) on all new money deposited, a rate adjusted periodically. (The overall rate of return for the past 10 years was 5.62 percent). Because TIAA-CREF manages the underlying pool of money by investing mostly in bonds and related securities, rates in the coming years will probably be fairly low, but your contributions are contractually guaranteed.

This is an excellent investment for those who react very badly to market drops. However, while you do not face market risk, you do face individual company risk. If TIAA-CREF went bankrupt, its guarantee would mean nothing. That's why the firm's profitability and stability are crucial.

Note: To guarantee your principal plus a rate of interest, TIAA-CREF puts some fairly strong restrictions on clients' ability to transfer money in and out of this annuity. Don't commit money to TIAA Traditional unless you are content to let it sit until you retire. You can get it out, but it will be difficult.

Tip: Concentrate your TIAA Traditional holdings in your main 403(b) account, since a much lower rate of interest (currently 0.75 percent less) will be paid on it in your Supplemental Retirement Account (SRA), if you have one.

TIAA Real Estate Variable Annuity. The funds in this distinctive offering are invested directly in real estate (office buildings, malls, industrial parks, and so forth). Buy in, and you get the perks of being a property mogul and landlord, without all the hassles.

CREF Variable Annuities. These function a great deal like regular mutual funds. There are five stock-market options: Global, Stock, Equity Index, Growth, and Social Choice. Global and Stock both invest in world stock markets, including U.S. and international ones. Equity Index and Growth are solely U.S. stock-market funds. Social Choice screens for certain ethical and political criteria. Then there are three options that apply to the more stable, less risky part of your portfolio: Bond, Inflation-Linked Bond, and Money Market.

It may be that your university plan also offers, beyond the above annuities, TIAA-CREF's vast array of mutual funds, which come in almost infinite variations, including LifeCycle funds (all-in-one, no-brainer options for those who want to put things on autopilot) or highly specific funds focusing on specific sectors of the stock market, such as small-cap companies.

The precise mix that is right for you depends on your risk tolerance and time frame. There are decent models on Page 12 of this brochure. No need to make it complex, though. A pretty good holding could be amassed in just TIAA Traditional (20 percent); TIAA Real Estate (10 percent); one of the stock-market annuities, perhaps Equity Index since it costs you the least, or Global since it has international diversification to offer (60 percent); and the inflation-adjusted bond option (10 percent). Reduce the equities portion and increase the bond if you are skittish or near retirement.

Remember that the current market mayhem may mean you will be buying low. Don't let it scare you away from stocks, even if, in the short term, you see some declines.

Another thing to pay attention to: costs. TIAA-CREF's expense ratios are cheaper than industry averages—so they note in their literature—but what they don't say is that they are far from the cheapest in the business. If Pennywise had one thing he'd like the company to do better, it would be to reduce expense ratios. CREF Equity Index, for example, has an expense ratio of 0.42 percent, seven times more than what the equivalent Vanguard 500 Index ETF charges (0.06 percent).

In a future column Pennywise hopes to take up the options facing those TIAA-CREF investors who are retiring—a whole different kettle of fish.

If you need further help making sense of TIAA-CREF's investment choices, the consultants who meet with you face-to-face on campus will probably be better informed than the advisers in the phone centers. Also check out this online Morningstar forum.

Finally, Pennywise's series of columns on investing for retirement may help on the basics (see links to those columns below). To achieve a successful retirement, take full advantage of your employers' match, save consistently, diversify well, and leave the assets alone to grow.

Editor's Note: See Pennywise's previous columns on investing for retirement: "Investing for Retirement"; "How Much Should I Save?"; "Tolerance, Risk, and Reward"; "Saving, Speculation, Investment"; "Diversification Still Works"; "Choosing Investments for Balance," and "Of Human Bondage," and "Of Human Bondage, Part 2."

Professor Pennywise, who writes "Academic Assets" monthly, is the pseudonym of a humanities professor who has taught from the Pac-10 to the Big Ten and is not a financial professional, merely a frugal academic. Comments and questions for future columns may be sent to