Friday, April 24th was a big day for two behemoth companies.
One, the dominant world leader in personal computers and mobile devices and the largest publicly traded corporation in the world by market capitalization. The other, one of the world’s largest financial services organizations, serving the academic, research, medical and cultural fields.
On April 24th, Apple began shipments of the long awaited Apple Watch. Apple Watch is a smartwatch that integrates with the iOS operating system and the iPhone, proprietary to Apple. Early estimates have the initial orders already in excess 1.7M units with an average price over $700 per watch. This has been national and international news, hitting every major news outlet.
Friday, April 24th, was also the day that College Retirement Equities Fund (“CREF”), the companion organization of Teachers Insurance and Annuity Association of America (“TIAA”), rolled out new multi-share class versions of their eight investment portfolios. Like the Apple Watch, CREF funds are only available to clients on TIAA’s proprietary platform. The CREF portfolios are actually not mutual funds, but sub accounts within a variable annuity contract. Not only was this not considered newsworthy on a national basis, I struggle to find any mention of it other than the obligatory shareholder notice filings,FAQ notices, and employer flyers (image below)on their own website.
The new class designation is based on an institution’s total assets in CREF Accounts across all plans. Smaller plans, with total CREF assets (not TIAA-CREF plan assets, just assets in CREF funds) less than $20M, will bear the brunt of the expense change. Assignment to the new CREF classes will be determined as follows:
Total CREF Assets
- Less than $20 million
- $20 million up to $400 million
- $400 million or more
The table below reflects the current and new the expense ratio for the three new share classes,R1-R3:
Individual clients with IRA or Keogh accounts are now in the RI share class, the highest share class. Annuitants, receiving annuity income payment will default to the least expensive share class, R3.
Why is TIAA’s news significant? Fund companies modify their expense ratios all the time? This time it’s different. As of December 31, 2013, CREF’s net assets were approximately $227 billion. The average participant in a retirement plan that has less than $20M in CREF assets are now paying 50-60% more for the same CREF funds they owned before April 24th. TIAA, as the administrator of these “smaller” plans, has also increased what they receive internally by 45%. Within the expense ratio of the fund is a plan services expense, also referred to in the industry as "revenue share". From TIAA’s site, “The plan services expense, also known as the recordkeeping offset, is the portion of the expense ratio paid to TIAA that is used to offset the cost of recordkeeping and other administrative services.” The plan services expense is changing from a current .24% to .35% for the R1 funds. Thisis a component of the administrative expenses, not an additional amount.
Many of TIAA’s clients are retirement plans that are exempt from ERISA (Employee Retirement Income Security Act) since many plans, such as church plans and many retirement accounts in the grades K-12 education market, are not subject to ERISA. All 401k plan’s and most 403b’s plans, found in the non-profit, private school and higher education’s markets are subject to ERISA. ERISA’s standard of care for a plan fiduciary, as it relates to the cost of administering a retirement plan, is a test of “reasonableness.” Under ERISA’s prohibited transaction rules, the responsible plan fiduciary is prohibited from permitting a plan to enter into an arrangement with a service provider unless the arrangement is “reasonable”. The marketplace usually determines what the “reasonable” cost of delivering administrative services for a retirement plan, not the revenue sharing that may or may not exist within the funds offered in a plan. It is also unusual that a vendor providing recordkeeping services mandate what the revenue requirements are for all plans based solely on asset size in a proprietary fund offering?
The new class structure will affect only the Administrative & Distribution expenses, which will result in a different overall expense ratio for each class. The new CREF classes will impact CREF assets held in retirement plans at current and previous employers, as well as any individual plans/products employees may have. To TIAA’s credit, they have historically delivered lower cost investment options than comparable annuities and mutual funds. Cost is one of several criteria when selecting appropriate funds. Bottom line, get educated to how this may affect you or your plan.
So April 24th may have come and gone, and your Apple Watch is likelystill be on backorder. If you have a TIAA-CREF account, or you are an employer offering TIAA-CREF to your employees, especially if your plan has less than $20M in CREF assets, maybe you can use your new Apple Watch to see what these changes are costing you?
Kent Fitzpatrick, Accredited Investment Fiduciary Analyst(AIFA), Accredited Retirement Plan Consultant(ARPC) and Global Financial Steward (GFS) is the Managing Director of Asset Strategy Advisors, LLC, a Registered Investment Advisory firm. He can be contacted at www.assetstrategyrc.com,@assetstrategy,or 781-235-4426.