Investment firm TIAA to pay $97 million settlement for pushing customers into higher-fee accounts

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TIAA, one of the nation's largest and most trusted investment advisory firms, fraudulently pushed tens of thousands of its customers into higher-fee accounts, benefitting the firm but raising investors' costs, according to a settlement with the firm announced today by Letitia James, the New York attorney general, and the federal Securities and Exchange Commission.

"For years, TIAA put profits over people, taking money from people's hard-earned retirement funds," said James, announcing the settlement. "TIAA relied on its reputation as a trusted and objective financial adviser to profit off of clients through fraudulent and manipulative sales practices."

Calling it a case of "corporate greed," the attorney general said TIAA would pay $97 million to settle the matter, money that will go back into the pockets of affected clients throughout the U.S. TIAA must also reform its sales practices under the deal, which also includes a $9 million civil fine.

TIAA is a huge investment firm, with $1.3 trillion in assets under management. It began life in 1918 as a nonprofit entity set up to provide guaranteed retirement income and life insurance to the nation's educators. Founded and funded with a $1 million donation by Andrew Carnegie, TIAA grew to specialize in retirement accounts and investment advice for employees working for colleges and universities, medical research organizations, cultural groups and other nonprofits. TIAA lost its nonprofit status in 1997 when Congress passed a tax reform bill and said the company's tax status gave it an unfair advantage over competitors.

Still, TIAA continued to highlight its "nonprofit heritage" in marketing materials. In 2017, its then-president and CEO said, "Our values make us a different kind of financial services organization, known for our integrity." TIAA serves more than 15,000 institutions and 5 million customers, its website says. Most of the firm's clients invest with it because their employers have hired it to administer their retirement accounts, known as 403(b) plans.

Chad Peterson, a TIAA spokesman, said in a statement that the firm was pleased to settle the regulatory matter. The firm neither admitted nor denied the allegations.

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TIAA "learned some valuable lessons and have applied those lessons to enhancing our training, supervisory controls and disclosures," the spokesman's statement said. "We regret the times that we did not live up to our clients' expectations of us."

At the center of the investigation, James said, was TIAA-CREF Individual and Institutional Services Inc., its investment advisory group. Beginning in 2012 and extending into 2018, the New York attorney general said, TIAA sales representatives "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 employee-sponsored plans that customers were moved out of performed better than the adviser accounts, the attorney general said.

Such high-pressure sales practices at TIAA were the subject of an investigation in The New York Times in 2017. In that report, former TIAA employees told of the firm's push to shift customers into higher-paying accounts. The firm directed the employees to meet outsized sales quotas, the former workers said, by playing up clients' fears of not having enough money in retirement. "Making the Client 'Feel the Pain'" was a headline atop one piece of TIAA sales training material, a second report said.

Some employees who refused to push customers into the higher-cost accounts were phased out of the company, the former employees said.

In announcing the settlement with TIAA, the New York attorney general said the company's sales representatives "falsely described themselves as 'objective' and 'noncommissioned' advisers who could be seen as 'a trusted partner' that worked in a client's 'best interest.'" In fact, the sales representatives were conflicted — heavily incentivized to pressure clients to roll their investments into higher-cost accounts, the settlement announcement said.

Advisers no longer receive different compensation for managed accounts, the TIAA spokesman said. TIAA also agreed to other reforms under the settlement, such as eliminating or fully disclosing other adviser conflicts of interests related to recommending managed accounts and training advisers to offer a fair comparison between managed accounts and employer-sponsored plans.

Editor’s Note: The author is a trustee of St. Olaf College, an institution that employs TIAA as record keeper on its retirement plans. She will not advise or make decisions on matters involving TIAA's relationship with the college.