I Work In Higher Education: What is the TIAA Traditional in My 403(b)?

By Financial Advisor Carrie McDonnell

Who is TIAA?

TIAA (Teachers Insurance and Annuity Association of America) was first established in 1918 by the Carnegie Foundation for the Advancement of Teaching to provide guaranteed retirement income and life insurance to educators. Today, TIAA is one of the largest retirement plan providers for educators in the US.¹

What does TIAA offer educators?

What does TIAA offer educators? TIAA offers, among other things, annuities, mutual funds, and recordkeeping services to colleges, universities, and other not-for-profit and charitable institutions. One common product educators might see in their retirement plans is the “TIAA Traditional”. The TIAA Traditional is a type of annuity. Often TIAA participants do not realize that they are invested in an annuity and frequently participants are under-informed about what the pros and cons are of holding an annuity.

How does the TIAA Traditional work?

There are two phases to a TIAA Traditional - Accumulation Phase and Retirement Income Phase. During the Accumulation Phase, participants allocate retirement savings to the annuity and contributions earn interest at a guaranteed rate. During the Retirement Income Phase, participants can choose when and how to convert their savings into income payments, within the terms of the employer’s plan.

What Pros and Cons should educators consider before investing in the TIAA Traditional?

TIAA Traditional is described as a “lifetime income” product with a guaranteed rate of return. It’s sold as a “safe” and predictable alternative to market investments. For some participants, having a portion of their retirement savings in a fixed income investment instrument can be appealing and appropriate. However, it’s important to keep in mind the potential cons. For one, the TIAA Traditional may carry opportunity risk. TIAA Traditional interest rates have ranged from 3.25% to 6.25% over the last 20 years, depending on the type of plan offered.² In comparison, a “standard” low fee index fund 60 stock/40 bond portfolio has averaged 8.1% in the last 40+ years.³ In addition, this annuity poses liquidity risk. If a participant would like to get their money out of the annuity, most TIAA Traditional contracts have limitations. Commonly participants are limited to a 10% transfer per year, which can be frustrating for participants who want to seek out other investment opportunities or access more of their money.

How does a TIAA Traditional fit into my retirement savings plan?

If a participant believes TIAA Traditional is an appropriate investment for them, they will want to consider how an annuity fits into their larger investment plan. Commonly, participants will choose investment options (such as a target date fund) that are appropriate for their goals and timeline, but they do not take into consideration what it means to invest in the TIAA Traditional alongside these other market investments. Due to the nature of the TIAA Traditional, often participants end up with an investment plan that is too conservative and doesn’t match their risk tolerance or long term growth goals.

Educators and other non-profit employees who have a TIAA Traditional should speak to a financial advisor about whether this product is right for them and how it could fit into their larger investment plan.

Carrie McDonnell is a One Day In July financial advisor located in Central Vermont. Learn more about Carrie here.

1. https://www.tiaa.org/public/learn/retirement-planning-and-beyond/how-do-traditional-annuities-work
2. https://www.tiaa.org/public/modal/crediting-interest-rates-2022
3. https://www.schwabassetmanagement.com/content/long-live-6040-portfolio