TIAA invented the variable annuity with the CREF Stock Account in 1952 – a revelation at the time. For almost 40 years, TIAA offered only TIAA Traditional and CREF Stock. In 1988, TIAA opened CREF Money Market, which was followed by CREF Bond Market in 1990 followed by CREF Global Equities in 1992. This gave participants the opportunity to diversify their portfolio internationally and investors jumped at the chance bringing the total assets in the annuity to over $21 Billion as of the second quarter of this year. Investors still in CREF Global Equities need to understand, it may not be everything they thought it was.
There is a difference between a global investment and an international investment. A mutual fund or annuity which is described as international invests a large majority outside of the United States. With this in mind, an investor who would like 10 percent exposure in international stocks can put that same percentage in an international fund and cover that asset class in their portfolio.
By using the term global, this implies that not only is CREF Global Equities invested internationally, but also in U.S. Stocks. As of June 30, 2018, CREF Global Equities is slightly over 56 percent invested in U.S. stocks with close to 42% invested internationally. This is not the international exposure many think they have. In the example above, an investor would need to invest roughly 24 percent of their portfolio in CREF Global Equities just to get a 10 percent allocation in international stocks. With out this knowledge, the integrity an asset allocation could be sabotaged.
As with any investment, the expenses associated with them is an extremely important consideration. I have written in the past about the problems associated with the R1, R2, and R3 fee structure used by TIAA. When looking at the expenses associated with CREF Global Equities on TIAA’s website, they naturally default to the lowest internal expense ratio. The expense ratio is the hidden fee which eats away at an investor’s returns. As of June 30, 2018, the Class R3 expense ratio (lowest class expense) is 0.34 percent. This is a very reasonable expense for an investment with international exposure. Once we look at the R1 expense ratio, it jumps up to 0.61 percent – not impressive. As with any variable annuity at TIAA, participant’s must understand which class their investments fall into.
With changes in retirement plans over the last few years, most university plans not only offer CREF Global Equities, but international funds as well. For TIAA participants, it may be worth comparing international options and exploring the idea of using an investment other than CREF Global Equities. A rollover to an outside IRA which offers different asset classes and international options can complement the asset allocation of money with TIAA.
Kevin McNab is the leading national independent wealth management advisors working with clients in the academic, medical, and cultural fields. If you would like to work with Kevin, please reach out with questions.