There was a time not too long ago when professors and university employees had one choice for their retirement plan provider – TIAA-CREF. Unlike the private sector, many university employees now have more than one choice to invest their retirement accumulation. Starting around twenty years ago, universities started offering multiple retirement plan options. This added another layer of choices and confusion for investors trying to choose the best option for their financial plan. This article provides an overview of the pros and cons of the four main retirement company options offered at universities – Fidelity, TIAA-CREF, Valic, and Vanguard.
Fidelity is one of the main players in the retirement plan markets. One of Fidelity’s perceived strengths for many years was the abundance of funds offered over other competitors. For an experienced investor, an abundance of funds is attractive. However, a novice investor trying to navigate through dozens of funds can cause confusion and the mismanagement of their allocation. Fidelity’s fund costs are reasonable and they recently have offered some very low cost indexed funds at universities – other competitors such as Vanguard and TIAA-CREF offer lower cost funds on average. Fidelity also offers representatives at most larger institutions to provide a level of guidance to employees. Unfortunately, one of the key evaluation components of these representatives is to consolidate assets into Fidelity – expect to get a sales pitch during a meeting. Overall, the ease of doing business and conducting back office transactions with Fidelity is very high.
TIAA-CREF owns the greatest market share of retirement plan assets in the academic, medical, and cultural fields. TIAA-CREF’s greatest strength is the uniqueness of the TIAA Traditional Annuity and TIAA Real Estate to help diversify a portfolio. For a long time, TIAA-CREF’s weakness was lack of number of funds available to participants. However, this has change over the last few years with TIAA-CREF offering open architecture to most mid-sized and large universities. Although TIAA-CREF’s internal costs are not as low as Vanguard’s, they still have reasonable expense ratios in most cases. Unfortunately, the expense ratios can be different depending on the employer. TIAA-CREF offers consultants, along with free “advice”, to participants at most universities. Again, a major component of a consultant’s evaluation is asset growth so expect to get solicited to transfer money to TIAA-CREF and possibly offered high cost asset management solutions. A major weakness of TIAA-CREF is a complex back office system with poor customer service that leads to transnational mistakes.
VALIC or Variable Annuity Life Insurance Company is known for having commissioned-based financial advisors combing campuses at most universities. VALIC was a division of AIG and started to rebrand as AIG until an obvious decision was made in 2009 to go back to branding as VALIC. Potentially, a great advantage of this is having a dedicated advisor to help guide an investor through key financial decisions. However, many VALIC advisors are past teachers and professors with little knowledge and a motivation to grow assets to increase their commissioned based income. The expenses for the VALIC funds are very high when compared to competitors. They do offer a fixed account which can be valuable for diversification purposes. If a good advisor is found, the dedicated service provided along with financial planning could justify the cost for a novice investor. In most instances, this is not the case. I do not see VALIC as a viable options for university employees.
The main advantage of Vanguard is low fees – not among the lowest in university retirement plans, but among the lowest in the industry. Vanguard typically offers a nice selection of low cost, indexed mutual funds among your typical core asset classes. If you invest with Vanguard, expect all of your interactions to be done electronically or over the phone. You will not have the ability to meet with an advisor from Vanguard on your campus. In addition, Vanguard’s back office usually is very efficient and runs smoothly.
There is no right or wrong answer to which retirement plan provider you use. It is important to make an honest assessment of your abilities and knowledge as an investor and pick the company that you’re most comfortable with and best fits your ability to reach your goals. In many cases, the first step may be to talk to your coworkers to get their experiences. In other cases, it may be best to contact the Professor’s Advisor!