TIAA-CREF recently announced a change to the expense structure of the CREF variable annuities. Since the inception of CREF Stock in 1952, TIAA-CREF has had a single class low-cost structure for all CREF variable annuities. Beginning April 24, TIAA-CREF is expanding each variable annuity from one class to three classes based on the size of the institution the participant made contributions through.
These new classes will be designated as R1, R2, and R3. The R1 class will be designated for participants with accumulations from institutions with less than $20 million in assets with TIAA-CREF, R2 will be designated for mid-sized institutions with assets from $20 million up to $400 million, and R3 is designated for participants with contributions through the largest institutions. The internal expense ratio for the R1 class will be significantly higher than the expense ratio for the R3 class. For example, the current expense ratio for CREF Stock is a respectable 0.455%. The estimated new expense ratio for CREF Stock under the least expensive R3 classification is 0.370% and for the most expensive R1 classification is 0.660%.
These classifications create an entirely new level of complexity for the TIAA-CREF investor. First, the difference in the expense ratio between R3 and R1 classifications is extremely significant. TIAA-CREF has always been known as a low cost carrier – it will be hard to make this claim with expense ratios in certain instances nearing 70 basis points (or 0.70%). It is troubling in this scenario the investor with over $1 million in assets could be charged almost double what an investor with $5,000 in their account simply due to the institution they worked and contributed through. What is even more troubling is TIAA-CREF is slapping the highest expenses on their IRAs.
Many professors work for multiple institutions and may have three separate classifications. TIAA-CREF participants will have to be savvy with the decisions they make regarding where to transfer accumulations to receive the lowest fees. If investors fall into the R1 classification, it may be time to look into a lower cost carrier to lower expenses by a half of a percent. Although TIAA-CREF has communicated this change, many investors will not understand the significance of this change. Savvy investors will make changes to keep fees low.
Note, the accounts affected by these changes include CREF Stock, CREF Global Equities, CREF Growth, CREF Equity Index, CREF Bond Market, CREF Inflation-Linked Bond, CREF Social Choice, and CREF Money Market