2009 Defined Contribution Rule Brought TIAA-CREF New Competitors

TIAA-CREF, the dominant player in the higher-education retirement market, is seeing increased competition from some U.S. life insurers, one year after new regulations merged the rules for 401(k) and 403(b) defined contribution plans.

Insurers are seeking to encroach on its turf, but the company thinks its value proposition is better than anyone entering its space, said Bertram Scott, chief institutional development and sales officer for TIAA-CREF.

The Internal Revenue Service's 403(b) regulations took effect in January 2009 for retirement plans subject to the Employee Retirement Income Security Act. With the regulations, also issued by the Department of Labor, 403(b) plan rules have become more similar to 401(k) plan rules.

The company said it's the largest manager of employer-sponsored 403(b) plans, a defined contribution retirement plan for employees in the education and other nonprofit fields. Like 401(k) plans, 403(b) plans also are tax-deferred.

The new 403(b) regulations, Scott said, place increased reporting requirements on employers, "making it much less appealing" to work with many investment providers. As an example, employers are now responsible for ensuring that employees are within the IRS limits for hardship and loan distributions across all investment providers, he said.

"These changes have prompted employers to focus on the best overall value for their employee benefit dollar," Scott said. The providers that have helped clients navigate these changes, continue to be financially strong and provide noncommissioned advice "are getting a strong response from clients."

TIAA-CREF doesn't employ soliciting agents so it doesn't incur commission costs, according to BestLink.

Scott said TIAA-CREF, a huge asset manager, is seeing more people move money into fixed income when investing for retirement planning, following the global financial crisis. But TIAA-CREF has always encouraged participants to have a diversified portfolio, which means not putting all of their money into equities or into fixed income, he said.

And just like others in the life insurance industry, TIAA-CREF cheers annuitization as a way for people to secure an income in retirement. Last month, Roger W. Ferguson Jr., the company's president and chief executive officer, wrote a letter to a national business newspaper touting the benefits of annuities.

The company has always emphasized having a portion of one's income annuitized during retirement to make sure basic needs, such as housing, food and health care costs, are covered, Scott said. That's what traditional defined-benefit pension plans were intended to do and what TIAA-CREF has been able to do over its 90-year history, he said.

Meanwhile, TIAA has incurred significant investment losses stemming from the economic downturn, according to BestLink. A.M. Best also noted the potential for more material credit losses as TIAA maintains significant holdings in commercial mortgage-backed securities and direct commercial mortgage loans and in non-agency residential mortgage-backed securities.

The fact that commercial mortgage delinquencies are starting to materialize across the industry is a key concern in the near to medium term, Best said.

Scott said the company won't be immune to market declines but that investment losses have not gotten to a level where rating agencies are concerned about its solvency and ability to be an effective claims-payer.

TIAA-CREF, which consists of the Teachers Insurance and Annuity Association and its subsidiary, TIAA-CREF Life Insurance Co., combined with TIAA's sister organization, the College Retirement Equities Fund, forms one of the largest retirement systems in the United States, with $402 billion in combined assets under management at Sept. 30, 2009, according to BestLink. Its core market is people who work in the nonprofit academic, medical, research and cultural fields. It's biggest market is higher education.

Last month, A.M. Best revised the outlook to negative from stable and affirmed the issuer credit ratings of aaa of TIAA and its insurance operating subsidiary, TIAA-CREF Life. It also affirmed the Best's Financial Strength Rating of A++ (Superior) of TIAA and TIAA-CREF Life (BestWire, Dec. 18, 2009).

According to Morningstar, TIAA-CREF ranked third in U.S. sales of stock-market linked variable annuities in the third quarter of 2009, with sales of $10.5 billion (BestWire, Dec. 10, 2009).

[An audio interview with Scott, where he discusses how the company continues to try to broaden its focus beyond the core pension business, will be available at www.bestdayaudio.com beginning Jan. 12].

(By Fran Matso Lysiak, senior associate editor, BestWeek: [email protected])