TIAA-CREF has agreed to pay about 20,000 customers a total of $97 million to settle charges of misleading investment sales practices and conflicts of interest by the insurer's New York-based broker-dealer and investment advisory business.
- TIAA-CREF subsidiary TC Services will pay a total of $97 million to settle charges that its salespeople misled customers into moving their money from low-cost employer retirement plans to higher-cost individual accounts.
- About 20,000 clients who opened Portfolio Advisor accounts between January 2012 and March 2018 will be eligible for compensation.
- The U.S. Securities and Exchange Commission and the New York State Office of the Attorney General cooperated in the investigation that led to the settlement.
- TIAA also agreed to make significant internal reforms and said it will be reaching out to the affected customers.
The Charges Against TIAA
TIAA-CREF Individual & Institutional Services, or TC Services, settled with the New York State Office of the Attorney General (AG) and the U.S. Securities and Exchange Commission (SEC) on July 13 after parallel multiyear investigations into advisors' conflicts of interest in their recommendations.
The SEC administrative order involves recommendations that the advisors made between January 2012 and March 2018, persuading clients to withdraw assets from their TIAA-administered employer retirement plans to open individual managed accounts in TIAA's Portfolio Advisor program.
Federal and state investigators said that TC Services didn't reveal advisors' compensation for those rollover recommendations, created confusion for advisors and their clients about the legal standard that applied to their recommendations, and didn't give clients complete and accurate fee and performance information.
The Portfolio Advisor program "was significantly more expensive for clients and generated hundreds of millions of dollars in fees for TIAA," the New York AG's office stated in a July 13 press release.
The TIAA sales representatives also misrepresented their role, according to the regulators, identifying themselves as "objective" and "non-commissioned" advisors. In fact, they were driven by financial incentives and by supervisory pressure to identify clients' "pain points," according to the New York AG.
Advisors also misled clients by downplaying the significant benefits of the low-cost employer-sponsored plans, the SEC and the AG's office charged. In fact, the clients' original retirement plans actually had better risk-adjusted returns and projected performance than the new Portfolio Advisor accounts, a later analysis reported.
According to the SEC’s administrative order, this sales behavior was in willful violation of established federal securities and investment advisor laws.
Fiduciary Standards vs. Suitability Standards
The investigations' findings illuminate the difference between the higher fiduciary standard that TIAA's sales reps said they were adhering to and the less rigorous suitability standard. A fiduciary must always act, both legally and ethically, in their client's best interests, while the suitability standard simply requires that the product be suitable for the client's needs.
The SEC stated that TC Services trained its advisors to act as if they offered "objective" and "non-commissioned" advice and acted in clients' best interests, but the monetary incentives they received for switching clients into the individual accounts nullified any so-called fiduciary status.
What TIAA Agreed to Change
As part of the settlement, TIAA agreed to undertake significant internal reforms. It said it had begun to correct some of the problems back in 2017.
Those changes include:
- Subjecting all rollover recommendations to a strict fiduciary standard
- Eliminating differential compensation for sales of managed accounts
- Eliminating or fully disclosing other advisor conflicts of interest related to recommending managed accounts
- Using plain language to disclose when advisors are not acting as fiduciaries
- Training advisors to offer a fair comparison between managed accounts and employer-sponsored plans
TIAA to Notify Eligible Clients
The $97 million, which includes a portion of the managed account fees, interest, and the SEC's civil penalty, will be returned to all individual clients who opened Portfolio Advisor accounts with assets from TIAA-administered retirement plans during the period covered by the settlement, according to the company.
TIAA said that it will be reaching out to affected clients and addressing any questions or concerns they have.
"We cooperated with regulators, and we're pleased to settle this matter that covers a time period that ended more than three years ago," a TIAA spokesperson said.
“We have learned some valuable lessons and have applied those lessons to enhancing our training, supervisory controls, and disclosures, and we started implementing some of these enhancements even before regulators opened their investigations," the spokesperson added.