Questions and Answers on TIAA Interest Rates, Performance and Income
February 26, 2010
Individuals who are seeking investment income and retirement financial stability express interest in the guarantees that the TIAA Traditional Annuity offers. Some participants have questions about TIAA-CREF's "crediting rate," annuity income and other topics. The following Questions and Answers may help.
Interest Rates and Retirement Income
1. What is the TIAA Traditional Annuity?
The TIAA Traditional Annuity was established with the founding of Teachers Insurance and Annuity Association (TIAA) in 1918, and remains a centerpiece of many participants' retirement portfolios. The Traditional Annuity is complemented by an array of equity, fixed-income, money market and real estate investment offerings from TIAA-CREF.
The TIAA Traditional Annuity guarantees principal and pays a guaranteed minimum interest rate during the accumulation phase in accordance with the terms of the contract. This guaranteed rate can be increased by additional amounts at the discretion of the TIAA Board of Trustees. Such additional amounts, when declared, remain in effect for the "declaration year" which begins each March 1. Together, the guaranteed minimum plus additional amounts make up the "crediting rate" for those in the accumulation phase.1
TIAA has paid additional amounts in addition to the minimum guarantee each year since 1948. Additional amounts of interest are determined based on a number of factors, including investment performance, expenses, and the need to maintain adequate contingency reserves. While the investment returns of TIAA's general account do not flow directly to participants via the declared crediting rates, such additional amounts of interest do, in part, reflect the yields that TIAA obtains on bonds and other fixed-income investments. Because prevailing yields tend to change over time, TIAA groups the premium dollars it receives over defined time periods into vintages – typically composed of one or more contiguous calendar months – for the purpose of determining the crediting rates.
2. What do the new TIAA interest rates mean for my retirement income?
If you are receiving lifetime annuity income from TIAA Traditional, these rates don't affect you. The interest rates for lifetime annuity income are established each December for payments during the following calendar year. TIAA announced in December that in 2010 investors who receive lifetime income from TIAA Traditional will receive at least as much total income (guaranteed income plus additional amounts) as in 2009. To read that announcement, click here.
See Questions 7-10 below if you receive income via a TIAA Transfer Payout Annuity or Interest-Only Option, also referred to as the Interest Payment Retirement Option (IPRO).
3. I contribute to my TIAA-CREF account through my employer's retirement plan. Do interest rate changes affect me?
The interest rates affect you if you contribute to the TIAA Traditional Annuity. New contributions and transfers applied to TIAA Traditional will earn interest based, in part, on the prevailing interest rate at that time.
TIAA uses a "vintage" system to credit interest to participants in an equitable manner. With the vintage system different rates apply to different "buckets" of money, depending on when you contributed funds to the TIAA Traditional Annuity. Interest rate changes are sometimes made to the various vintages which affect the growth of prior contributions.
4. What if I start taking lifetime income today?
If you decide to start taking lifetime retirement income today, the amount of income your TIAA Traditional Annuity will pay is based on the interest rates we have set for annuities in the payout phase. These rates also vary by vintage. You can view all payout rates by vintage and contract type by viewing the information found here. Please note that the payout rate can change monthly.
Crediting Rates and Vintages
5. What is the difference between the guaranteed rate and the crediting rate?
The TIAA Traditional Annuity guarantees principal and pays a guaranteed minimum interest rate, as specified in the contract during the accumulation phase. This guaranteed rate can be increased by additional amounts at the discretion of the TIAA Board of Trustees. Such additional amounts, when declared, remain in effect for the "declaration year" which begins March 1. Together, the guaranteed minimum plus additional amounts make up the "crediting rate" for those in the accumulation phase.
6. Why are there so many different vintages?
Through the vintage system, different rates are established for contributions and transfers applied at different times. This approach reflects the fact that prevailing interest rates vary over time. And the TIAA General Account, which supports the contributions and transfers you make to the TIAA Traditional Annuity at different times, isn't earning one rate. Using vintages enables us to credit a range of rates that reflect in part what different "buckets" of money may be earning at different times.
TIAA's Trustees can establish new rates at any time, but they are usually not more frequent than once a month. The frequency depends on a number of factors, including the interest-rate environment at the time and the performance of the TIAA General Account's assets that support the TIAA Traditional returns. Rates could change every month for several months, or they could hold steady for several months at a time. Once declared, rates remain in effect until the end of the "declaration year," which is the last day in February.
You can read more about vintages here.
TPA and IPRO Accounts
7. What is a Transfer Payout Annuity (TPA)?
A Transfer Payout Annuity (TPA) is an annuity option that provides for transfers and withdrawals of accumulated funds in 10 annual installments from an RA or GRA. A TPA is not an accumulating annuity like a Retirement Annuity or Group Retirement Annuity, so it will not have an accumulation value. The contract value is based on the present value of the remaining TPA installments. This value will decrease as each transfer or payment is made.
8. When will I know what my TPA payments will be?
TPA payments made during the 12-month period beginning April 2010 will be unchanged from previous levels
9. What is the Interest-Only Option?
The Interest-Only Option, also called Interest Payment Retirement Option (IPRO), enables you to receive the interest that would otherwise be credited to your TIAA Traditional Annuity account. This option is available to individuals between the ages of 55 and 69½ for TIAA Traditional accumulations in Retirement Annuity, Group Retirement Annuity, Retirement Choice contracts. Taking only interest allows you to receive payments while preserving the value of your accumulation.
10. When will I know what my Interest-Only payment will be?
Interest-Only payments made during the 12-month period beginning with your March 31, 2010 payment will be unchanged from previous levels.
TIAA Traditional
11. What is the difference between the Standard Payment Method and the Graded Payment Method of receiving income from a TIAA Traditional Annuity?
You can choose to receive lifetime income from the TIAA Traditional Annuity under either of two methods: Standard and Graded. Both guarantee a minimum interest rate that is generally 2.5%. However, the total amount that you receive as current income is different under the two methods.
Lifetime income under the Standard Method is based on the TIAA interest rate (which is a guarantee of 2.5% plus additional amounts, which represent interest earned in excess of the guaranteed rate) and is paid to you on a current basis with each payment. You will receive the same amount of income until there is a change in the level of additional amounts; any such change would take effect as of the beginning of the calendar year.
The Graded Payment Method was created with inflation in mind. The Graded Method uses some of your current income to "purchase" future income so that your payments will more likely increase from year to year. In effect, the additional amount that is credited to you each year is split. You get one part as income, added to your TIAA Traditional guaranteed monthly payment. The other part is used to increase your baseline income in the following years. Choosing the Graded Method usually means you take a lower initial payment than under the Standard Method, which includes the total payout interest rate with each payment. When comparing the two methods, keep in mind that it can take a number of years for payments under the Graded Method to catch up to and surpass amounts paid under the Standard Method.
12. I am planning to annuitize my retirement savings into a TIAA Traditional Annuity. Will my future income increase if interest rates in the marketplace rise from their current low levels?
Your initial income from TIAA Traditional does depend, in large part, on prevailing interest rates in the marketplace. Rates from the long-term investments that back the TIAA Traditional Annuity guarantees may not change substantially over time, and thus lower rates in the marketplace at the time of annuitization can mean lower income for many years — since increases in interest rates may not affect the long-term investments that are held to support these payments.
For example, a participant who chooses to annuitize $100,000 at 5% using the Standard Method might initially receive about $625 a month based on a particular age and income option. However, if the rate is 7%, this annuitant would receive about $750 in monthly income. So you may want to delay annuitizing if you think prevailing interest rates are going to rise. Note that this strategy can backfire if rates do not rise.
TIAA-CREF
13. What is the difference between TIAA and CREF?
The Teachers Insurance and Annuity Association of America (TIAA) is a life insurance company that holds the highest financial strength ratings from all major independent insurance ratings agencies.2
The TIAA Traditional Annuity is a guaranteed fixed annuity, whose returns are supported by the TIAA general account. The TIAA general account primarily invests in corporate and government bonds, structured finance instruments (such as mortgage-backed securities) and real estate. The returns and payment obligations of the TIAA Traditional Annuity are backed by TIAA's claims-paying ability. It is important to note, however, that participants do not participate in the performance of the TIAA general account holdings. Instead, those who choose to allocate a portion of their retirement savings to the TIAA Traditional Annuity make contributions that purchase a specific amount of future lifetime income, based on the contractual-rate schedule in effect at the time the contribution is made. Additional amounts, over and above the guaranteed amounts, are credited to participants as declared by the TIAA Board of Trustees on a year-by-year basis.
The TIAA Real Estate Account is a variable annuity account that seeks favorable long-term returns primarily through rental income and appreciation of real estate investments owned by the account. Its returns vary with the performance of its underlying assets.
The College Retirement Equities Fund (CREF) is a New York not-for-profit corporation offering a range of variable annuity accounts that invest in different asset classes. It operates at cost (i.e., without profit), with investment returns passed on to participants and reflected in variable annuity account asset values.
CREF and TIAA Real Estate account returns vary with the performance of the underlying asset values, and are not guaranteed like the TIAA Traditional Annuity.
14. How is TIAA performing?
TIAA has a strong capital base, thanks to prudent risk management and a long-term investment philosophy. TIAA's General Account supports our obligations including the guarantees on our fixed annuity products such as TIAA Traditional.
TIAA is one of just three U.S. life insurance companies to hold the highest insurance financial strength ratings from all four major ratings organizations. These ratings do not apply to variable annuities, mutual funds, or any other product or service not fully backed by TIAA's/TIAA-CREF Life's claims-paying ability. Ratings are subject to change. There is no guarantee that current ratings will be maintained.
This message is informational only and not intended to solicit any TIAA-CREF product or promote any contract transaction.
Past performance cannot guarantee future results.
TIAA-CREF products may be subject to market and other risk factors. See the applicable product literature, or visit www.tiaa-cref.org for details.
TIAA-CREF Individual & Institutional Services, LLC and Teachers Personal Investors Services, Inc., members FINRA, distribute securities products.
You can view prospectuses for variable annuities here.
1 Additional amounts are not guaranteed for future years and, when declared, remain in effect through the "declaration year," which begins each March 1. TIAA Traditional does not have an expense ratio but offers a guaranteed rate that is net of expenses borne by TIAA.
2 The respective highest possible ratings from these independent analysts are A++, A.M. Best Company (as of 12/09); AAA, Fitch (as of 6/09); Aaa, Moody's Investors Service (as of 10/09); AAA, Standard & Poor's (as of 6/09). These ratings are for TIAA as an insurance company and do not apply to variable annuities, mutual funds or any other product or service not fully backed by the claims-paying ability of TIAA. Ratings are subject to change. There is no guarantee that current ratings will be maintained.
