Questions and Answers on TIAA Interest Rates, Performance, Income, and Investing for the Long Term

Please note this list of questions and answers will be updated periodically with additional queries.

How is TIAA-CREF performing compared with other financial companies?

While TIAA-CREF is performing well compared with other financial companies, our organization is still not immune to overall market conditions.  TIAA-CREF ended 2008 with $363 billion in assets under management (as of 12/31/08).  While this is a decrease of about 17% from the prior year, other financial companies experienced much steeper declines. 

TIAA has a strong capital base, thanks to prudent risk management and a long-term investment philosophy.  TIAA has limited exposure to collateralized debt obligations and other types of highly leveraged securities that have produced large losses for some financial companies.  At the same time, TIAA, as a long-term investor, cannot completely avoid losses attributable to overall market conditions and the continuing economic downturn. Current and future portfolio holdings remain subject to risk.

Over the 3-year period ending March 31, 2009, 68% of TIAA-CREF's funds and variable annuity accounts have met or exceeded their Morningstar median. Over the 5-year period, 64% of TIAA-CREF's funds and variable annuity accounts have met or exceeded their Morningstar median.¹

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.
• 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 account returns vary with performance of the underlying assets values, and are not guaranteed like the TIAA Traditional Annuity.   For more on TIAA-CREF's unique structure and heritage, and how it enables us to help meet the financial needs of the individuals and institutions we serve, please click here.
 
Why have the TIAA Traditional Annuity interest rates decreased in recent months?

TIAA Traditional Annuity returns 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.  The recent decline in the rates TIAA is crediting reflects, in part, prevailing interest rates in the marketplace and expected returns from other investments.

In addition, while TIAA has a strong capital base and very limited exposure to the types of highly leveraged securities that have produced large losses for some financial companies, we are investing for the long term and are not immune from the continuing economic downturn. As stated previously, however, current and future portfolio holdings are still subject to risk.
 
The lower interest rates also reflect TIAA's commitment to meet participants' income needs over the long term. The Trustees of TIAA set the interest rates at a level that allows TIAA to guarantee and pay lifetime income to millions of retirees.  The interest rates TIAA credits are based on conservative assumptions to help ensure that we can fulfill our commitment to participants who choose the security of lifetime retirement income.

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 Account. New contributions or transfers applied to TIAA Traditional will earn interest based, in part, on the prevailing interest rate at that time. 

TIAA uses a "vintage" system, which we believe is the most equitable way to credit interest. 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.

Is the guaranteed rate that I earn on my money in TIAA Traditional declining? What is the difference between the guaranteed rate and the crediting rate?

The guaranteed rate is not declining. The TIAA Traditional Annuity guarantees principal and pays a guaranteed minimum interest rate during the accumulation phase - generally 3% for most participants. 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.³

What if I start taking lifetime income today?

If you decide to start taking lifetime retirement income today, how much income your TIAA Traditional Annuity will pay is based partly on the interest rates we have set for annuities in the payout phase.  These rates also vary by vintage. You can see all payout rates by vintage in the middle section of the chart available here. Please note that the payout rate can change monthly.

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.

What do the new 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 adjusted annually each December.  On December 11, 2008, TIAA announced that in 2009 all those receiving lifetime income from TIAA Traditional will receive at least as much total income (guaranteed income plus additional amounts) as in 2008, with some people even seeing minor increases.  For more on this announcement, click here.

However, if you're receiving income under the Interest-Only Option, also referred to as the Interest Payment Retirement Option (IPRO), TIAA Transfer Payout Annuity (TPA), or a fixed period annuity that was issued after March 1991, the current rates (that go into effect on March 1) will decrease the amount of your payment.  Your payment will also be affected by any interest rate changes in effect for accumulations in older vintages.

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, based on the payout rates in effect on the date the TPA amount is transferred or paid in cash. 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.

When will I know what my TPA payment will be?

Your new payments take effect in the month in which you annuitized.  If you would like to find out the amount of your payment, please call TIAA-CREF at 1 800 842-2776. Our consultants are available Monday through Friday 8 a.m. to 10 p.m. ET, and Saturday from 9 a.m. to 6 p.m.

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 Select, and Retirement Choice contracts. Taking only interest allows you to preserve your assets.

When will I know what my Interest-Only payment will be?

We mailed confirmation of your new payments at the end of March for the change that was effective April 1, 2009. If you need further information, please call TIAA-CREF at 1 800 842-2776. Our consultants are available Monday through Friday 8 a.m. to 10 p.m. ET, and Saturday from 9 a.m. to 6 p.m.

With the economy going through such a down period, what signs can investors look for as evidence of a recovery?

Brett Hammond, TIAA-CREF's Chief Investment Strategist, recently published a column that discuses his outlook on the market and possible signs to look for in any recovery.  You can view a video of Brett's report here.

My retirement is many years away, but I'm wondering what TIAA-CREF might suggest to help me build my portfolio?

You may be able to take some steps now that can benefit you when the market recovers. First, resist the urge to sell assets that have fallen in value due to the recent market downturn. Remember that you allocated some portion of your investments to equities as part of a diversified portfolio for a good reason. Historically, stocks have outperformed other asset classes and have recovered from steep drops over time. If the recent declines have left you feeling uncomfortable with your asset allocation, one of our advisors can help you rebalance your portfolio.

Also, if you are not already contributing the maximum to your retirement accounts, you can increase your contribution to help make up for lost assets.  For more ideas on rebuilding your portfolio please see this recent article.

Why did you recently cut the crediting rate for money I allocated years ago into TIAA Traditional?

The TIAA Traditional Annuity guarantees principal and pays a guaranteed minimum interest rate during the accumulation phase — generally 3% for most participants. 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. Crediting rates applied to the TIAA Traditional Annuity have generally been among the highest in the industry.

TIAA Traditional Annuity crediting rates 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 the yields available on bonds and other fixed income investments 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 rate for the applicable declaration year during the accumulation phase.

The crediting rate for each vintage is determined, in part, by the net investment earnings rate of the TIAA assets supporting that vintage. The net investment earnings rate associated with each vintage reflects the yields at which premiums are initially invested, as well as the prevailing market rates available at the time subsequent cash flows are reinvested as the initial investments pay income, mature, or redeem early.  The prevailing interest rates at which the reinvestments are made may rise and fall over time, but are currently at historically low levels.

In addition, while TIAA is performing well relative to other financial companies, TIAA is not immune to the continuing economic downturn, and there have been losses on existing investments. The crediting rates on older vintages also reflect such losses. TIAA continues to maintain a strong capital base to ensure that it will be able to meet its contractual obligations to participants.

I noticed the crediting rates for many of the older TIAA Traditional vintages were reduced this year, meaning the rates from older vintages set when interest rates were relatively high are now lower than recent vintages. Why has there been such a compression in the spectrum of the crediting rates from different years?

To the extent that TIAA is investing for the long-term and strives to provide stability in rates, it is the older funds that are more likely to turn over and be reinvested at the lower prevailing interest rates currently available in the marketplace.  This turnover results in lower expected earnings rates associated with older vintages, and corresponding lower credited rates. 

Also, as more of the underlying investments associated with supporting a vintage reflect subsequent reinvestments of cash flows at prevailing market interest rates, over time the earnings rates associated with older vintages tend to grow more similar to earnings rates of contiguous vintages, which results in the convergence of older vintages.

In addition, while TIAA is performing well relative to other financial companies, TIAA is not immune to the continuing economic downturn, and there have been losses on existing investments. The crediting rates on older vintages reflect such losses, whereas the crediting rates on new contributions to TIAA would not reflect such losses. TIAA continues to maintain a strong capital base to ensure that it will continue to uphold its contractual obligations to participants. Adjustments to the crediting rate help to preserve that strength and stability.

Why were the reductions in crediting rates for older vintages more severe this year than in the past?

Over the years TIAA's credited rates have risen and fallen along with varied business cycles and interest rate environments.  That remains the case in the current economic downturn. Notwithstanding the downturn, TIAA continues to maintain a strong capital base to ensure that it will continue to uphold its contractual obligations to participants.

It seems the vintage system allows TIAA to "lock-in" rates available in the marketplace at the time, so why reduce crediting rates for older vintages? Wouldn't money supporting the older vintages be invested in long-term bonds or other investments with fixed returns?

As discussed above, even though TIAA generally invests in long-term fixed income investments and strives to provide safety and stability, cash flows from the original investments must be reinvested over time as those investments pay income, mature, and, in some cases, are redeemed early. These reinvestments are then made at the prevailing interest rates of the time, which can be higher or lower than when the money was first invested.

What is the difference in receiving income from a TIAA Traditional Annuity between the Standard Payment Method and the Graded Payment Method?

You can receive TIAA Traditional Income under two methods, Standard and Graded. Both guarantee a minimum interest rate that is generally 2½%. 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 2½% 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.

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 will initially receive about $625 a month. However, if the rate is 7% an 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.

Why can't I move back to TIAA Standard or Graded once I've moved out? What is the company's stance on that?

TIAA is able to offer strong guarantees under the TIAA Traditional Annuity, in large part, because of the nature of the long-term investments in its general account, which are largely illiquid. Allowing participants to transfer back to TIAA Traditional could enable someone to transfer out of a lower rate vintage into one with a potentially higher rate, to the detriment of all other participants. The TIAA Traditional Annuity in the payout phase isn't designed for having money go in and out, which is why you can't transfer back in once you have transferred out and why there are limits on amounts and time periods for transferring out.