TIAA-CREF Individual & Institutional Services will pay $97 million in restitution to customers who were allegedly pressured to move their retirement investment accounts from low-cost employer-sponsored plans into higher-fee individually managed accounts that ultimately often didn’t perform as well.
The New York City-based financial services firm provides investment services and financial products for individuals who work at nonprofits.
According to a statement from New York Attorney General Letitia James, “Beginning in 2012 and continuing through March 2018, TIAA capitalized on its reputation and client goodwill and employed a fraudulent and misleading marketing pitch to convince its clients to roll over assets from low-cost, employer-sponsored retirement plans to higher-cost, individually-managed accounts in TIAA’s Portfolio Advisor program.” The higher costs chipped away at the value of participants’ retirement funds, the statement continued.
“TIAA’s sales representatives falsely described themselves as ‘objective’ and ‘non-commissioned’ advisors who could be seen as ‘a trusted partner’ that worked in a client’s ‘best interest,’” James continued. “In truth, however, these sales representatives were not objective and actually had a serious conflict of interest. They were heavily incentivized — through financial compensation and supervisory and disciplinary pressures — to identify clients’ ‘pain points.’ These pain points helped the company pressure clients into making different investments by essentially selling fear. This is when sales representatives would recommend that clients rollover their investments to the higher-fee, individually-managed accounts.”
Additionally, while TIAA employees told clients the company was acting under a fiduciary standard, the recommendations to roll over accounts were treated as though under a less rigorous “suitability” standard, according to the statement. The touted Portfolio Advisor accounts were misleadingly promoted as the only available option to self-directed investments, and the advantages of staying with employer-sponsored plans were either downplayed or not conveyed to clients, per James’s statement. Furthermore, many of the promoted features were available without charge in the employer-sponsored plans.
TIAA-CREF “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 wrote in response to a request for comment by The NonProfit Times. “We regret the times that we did not live up to our clients’ expectations of us. We have learned some valuable lessons and have applied those lessons to enhancing our training, supervisory controls and disclosures.”
The firm started “implementing some of those enhancements even before regulators opened their investigations, and we continuously look for ways to better serve our clients’ interests,” the spokesperson continued.
In an “Addressing issues raised by regulators regarding our wealth advisory sales practices” statement on its website, the company cited the settlement agreement that noted the AG’s settlement noted how TIAA had “voluntarily elevated all managed account recommendations to an investment advisory service under the fiduciary standard of care, a decision that was not required by regulations and that exceeds investment industry standards for broker-dealers; and Modified the advisor compensation plan so that advisors no longer receive differential compensation for assets in managed accounts as compared to plans.”
Ultimately, an analysis conducted by TIAA-CREF showed the promoted accounts did not perform as well as the assets under control of employer-sponsored plans that took advantage of third-party rebalancing recommendations. TIAA-CREF had performed a review of its procedures in 2017, but the subsequent changes the company made were insufficient, according to the statement.
In addition to the $97 million in restitution to affected investors, TIAA-CREF agreed to additional internal reforms, including:
* 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 interests 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
The agreement reached with TIAA-CREF resolves simultaneous investigations by the New York Attorney General’s office as well as the Securities and Exchange Commission.