A little bit of knowledge is a dangerous thing, and last week the New York Times published a pearl-clutching article that contained a little bit of knowledge. They reported that a TIAA (formerly TIAA-CREF) insider had filed a whistleblower complaint alleging:
“that TIAA began conducting a fraudulent scheme in 2011 to convert ‘unsuspecting retirement plan clients from low-fee, self-managed accounts to TIAA-CREF-managed accounts’ that were more costly. Advisers were pushed to sell proprietary mutual funds to clients as well, the complaint says. The more complex a product, the more an employee earned selling it.”
This is, obviously, not ideal behavior. But the Times article seems almost deliberately written to confuse investors about the behavior being alleged and its relevance to individual investors.
There is no allegation of wrongdoing in TIAA-CREF mutual funds or annuities
TIAA-CREF offers a range of mutual funds, including a social impact bond fund I’ve mentioned favorably in the past. There’s no indication that any of those mutual funds were mismanaged in any way.
TIAA also offers annuities. While annuities aren’t for everyone, they are a good fit for some people, and I don’t have anything against annuities in general for folks who want to pay up front to finance some or all of their retirement with a fixed or inflation-adjusted income stream (although I would generally urge against anything fancier than that). Just as above, there’s no indication in the Times’ reporting that TIAA annuities are being mismanaged or that annuitants are being taken advantage of in any way.
The wrongdoing is alleged against TIAA’s advisory business
What is really being alleged, and what is really troublesome, is that TIAA advisors are being incentivized to move TIAA’s captured investors (mainly public-sector employees) out of products which are best for the investor into products that are more profitable for TIAA. If true, that’s unacceptable and will hopefully lead to fines and sanctions against TIAA. If false, well, hopefully the Times will run another article when the claims are disproven or dismissed.
It is difficult to get objective advice
All this may come across as nitpicking, but there are a few reasons I think it’s important to take seriously the different kinds of claims that can be made against an investment manager or investment advisor.
An investment manager can abuse the trust of their customers in a range of ways. Perhaps most notoriously, a fund that claims to be “actively managed” and charges correspondingly high fees can be a “closet indexer,” in fact hugging an index that can be invested in for next to nothing. Likewise a mutual fund with a large cash holding and which charges a management fee on its entire portfolio, including cash, will be charging a disproportionately high management fee on its actual investment decisions.
An investment advisor also can abuse clients’ trust, for example by liquidating annuities, insurance policies, or real assets in order to “gather” assets under management, upon which the advisor will collect a fee or, as in the case of the allegations against TIAA, moving clients from low-cost self-managed accounts to high-cost TIAA-managed accounts.
If you’re not paying for your investment advice, who is?
In the interests of avoiding legal action for as long as possible, let me make the broadest possible argument and let you judge it on its own merits.
The responsibilities of mutual fund companies and insurance companies to their investors and annuitants are fairly clear in American law. A mutual fund can make bad investment decisions, and it can charge more than it deserves to charge, but it mostly can’t run off with the money to play roulette in Monte Carlo. An insurance company can go bankrupt (ahem, AIG) but it can’t simply decide not to pay annuitants their contracted payouts because it would prefer not to.
The responsibility of the employees of banks and insurance companies to direct clients to the mutual fund, annuity, or other investment product in that client’s best interest is much more unsettled in American law. And if you’re not paying someone to provide you with unconflicted investment advice, it’s not obvious that anyone is paying to provide you with unconflicted investment advice.
That creates an opening for any company, and I mean any company, to provide you with conflicted investment advice instead. That’s not unique to TIAA; there is a very large, very boring area of employment law addressing the question of whether companies have to select their 401(k) provider in their employees’ best interests or if they only have to select the investment options within the 401(k) in their employees’ best interests.
I’m not blaming victims, I’m trying to prevent victims
Obviously it’s infuriating to read about someone who has worked hard as a public servant, saved their whole life, and played by the rules discovering that they’ve been hoodwinked into an unsuitable investment. I’m not trying to minimize that: if TIAA really gave conflicted advice to their captured customers, they oughta pay for it.
But if you don’t want to be the next sympathetic story in a New York Times article, it’s up to you to identify those potential conflicts in advance and either make your own educated decisions or find an unconflicted advisor to assist you in making the decisions that are best for you, rather than for your 401(k) custodian.
That’s an annoying, burdensome responsibility. But if you aren’t willing to take it upon yourself, you’re likely to find someone else is willing to take it upon themselves to take advantage of you.