TIAA-CREF Investors May Be Losing Up to $1Million of Their Terminal Wealth
For Immediate Release Contact: Max Benavidez
January 29, 2007 626-799-1996
Drucker School Researchers Find That Millions of TIAA-CREF Investors
May Be Losing Up to $1Million of Their Terminal Wealth
Claremont, California—Millions of teachers, professors and other employees of tax-exempt non-profit organizations such as schools and universities have 403(b) retirement plans, also known as tax-sheltered annuity (TSA) plans, where the employee controls the allocation of retirement savings but the employer determines the choices available to the employee. Many private educational institutions and some public ones limit the employee’s investment choices to retirement vehicles managed by the $380 billion investment giant TIAA-CREF.
A team of Claremont Graduate University researchers is reporting in the Spring 2007 issue of Financial Management , the journal of the Financial Management Association International, that, based on historical performance compared to a broader list of index mutual funds, limiting the employee’s investment choices to retirement investment vehicles Managed by TIAA-CREF could result in the loss of more than half of the employee’s terminal wealth.
According to lead researcher Dr. Richard L. Smith, professor of financial management at the Peter F. Drucker and Masatoshi Ito Graduate School of Management, “Using historical data, we studied the efficiency of portfolios of retirement savings composed of the TIAA-CREF retirement vehicles relative to portfolios formed from a larger set of options that Includes several standard index funds. Assuming optimal rebalancing, depending on loss aversion, financial sophistication, and diversification constraints, the expanded menu outperforms the restricted portfolio by about two to one over the employee’s work-life.”
As Smith further explains, “Even if the employee simply invests equally in all of the choices, the expanded portfolio outperforms by about onethird. The TIAA-CREF shortfall arises because important asset classes such as international investment choices and small firms are underrepresented.” In dollar terms and based on historical performance, a risk-averse person who worked for 40 years and put $5,000 per year in the optimal TIAACREF portfolio could end up with $500,000 to $1,000,000 less in retirement funds.
The article, “What’s in Your 403(b)? Academic Retirement Plans and the Costs of Underdiversification,” also notes that 2006 changes in the federal tax code are leading some plan sponsors to restrict employees’ choices of investment vehicles to those offered by a single manager, such as TIAA-CREF.
The complete article can be accessed here: TIAACREF Paper
Dr. Smith is available for media interviews. To arrange an interview, please contact Max Benavidez at 626-799-1996 or email him at: maxbenavidez@earthlink.net
-Drucker Graduate School of Management
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