TIAA allegedly steering clients into high-fee products for billions

TIAA stands to reap billions of dollars in new revenues when clients use an advice tool that steers them into two in-house investment products that yield the company significant profits, a whistleblower complaint filed with the Securities and Exchange Commission in June alleges.

TIAA consultants benefit from recommending the tool and receive bonuses if they persuade at least 170 customers to follow its advice, the complaint and internal records show, according to NBC News. TIAA’s CEO and other top executives also stand to gain, it was alleged, because historically the firm’s executive compensation has risen when more investor money flows into one of the products to which the tool steers clients.

TIAA manages $1.2 trillion for five million clients, most of them saving for retirement in jobs at universities and other nonprofits. The company was founded in 1918 when an Andrew Carnegie foundation donated $1 million to provide school teachers with comfortable retirements.

However, TIAA has faced daunting financial challenges in recent years as teachers and others saving for retirement increasingly have opted for lower-cost investments than TIAA offers, its own executives have said.

TIAA has responded to this pressure with a sales push, according to the whistleblower complaint. At a sales meeting last fall, Thomas Rajotte, TIAA’s director of finance, told employees in a recorded presentation that the company could secure its future and offset its losses by selling in-house products to clients. “If they [clients] have Vanguard, we’re not earning any money on the product and we’re losing money on the recordkeeping,” he said. “Where we make that up is on the product side.”

The former financial consultant who filed the whistleblower complaint spoke extensively with NBC News and provided internal emails and recorded presentations by TIAA executives The whistleblower contends that TIAA misled clients regarding the investment tool by saying it provided independent advice tailored to each participant and failed to disclose that the firm’s financial consultants benefited when enough clients agreed to change their portfolios using its recommendations.

TIAA defended its actions in a statement provided to BenefitsPRO.

“We stand behind our financial consultants,” said Mike Tetuan, vice president and head of corporate communications. “We also stand behind the Retirement Advisor and Retirement Advisor Field View tools, and the investment advice and selection of asset classes provided within, which are developed by third-party Morningstar Investment Management. The tool’s asset allocation recommendations use the asset classes and investments available within the participant’s employer-sponsored retirement plan, which are selected by the plan sponsor or a third-party consultant selected by the sponsor.

Read more: TIAA’s ‘aggressive cross-selling’ ERISA lawsuit moves forward

“TIAA representatives are required to adhere to the tool’s recommendation and are trained on this. Additionally, we take our regulatory compliance and disclosure obligations very seriously. TIAA provides clients required disclosures around fees and conflicts of interests.”

The company works hard to earn and keep its clients’ trust, he added.

“TIAA believes in the importance of advice in achieving better outcomes in retirement, and we take great care to deliver advice that is in their best interest,” Tetuan said. “TIAA does not put its own interests ahead of our clients. Any claims to the contrary are false. TIAA is not owned by investors or shareholders and operates without profit in accordance with our charter. With no public shareholders and a charter that requires TIAA to operate without profit, TIAA is uniquely able to return profits to TIAA traditional policyholders and reinvest in our business for future sharing. We are proud to offer education and advice to help clients on a path to creating a more secure retirement.”