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Tuesday, March 30, 2010

TIAA-CREF Makes Life (Funds) More Expensive

News summary by MFWire's editors

The TIAA-CREF Life funds, which you invest in via variable annuities, are about to become a bit pricier. According to a regulatory filing, all ten Life funds will see their expense ratios rise (the increases range from three to 44 basis points) on May 1.

A TIAA-CREF spokeswoman noted that the funds will still be between 21 and 64 basis points cheaper than their median peers.

TIAA-CREF officials pointed to losses incurred in the provision of services to the funds as the reason for the proposed hike.

"The purpose of the increase is to more accurately reflect the costs of managing and servicing the Life Funds," Life Funds president Scott Evans wrote in a filing.

"It has become clear that the Advisor set its fees too low to cover its costs of providing services to the Funds," TIAA elaborated in the longer filing. "As a result, the Advisor has incurred losses in its provision of services to the Funds for many years. Despite these losses, the Advisor has not previously requested a fee increase. The Advisor has determined that this situation cannot be sustained, particularly in light of continued escalating costs related to increased compliance, regulatory and reporting requirements, as well as intensified competition for investment management talent."

"TIAA-CREF has incurred losses on the funds which is unsustainable," spokeswoman Jennifer Compton added in an emailed statement to The MFWire. "The change includes breaking out non-advisory expenses from advisory expenses, which is the industry standard."

This marks the third time in five years that TIAA-CREF is raising fees in some of its products. It is also a reversal of a move a decade ago when it lowered fees on its VA product.

Why is this happening? Since the hiring of former CEO Herb Allison (who left several years ago), TIAA has been transforming from a specialist firm that dominated the higher education market to a generalist that is attempting to compete across channels. The shift brings TIAA into higher costs channels.

Below are the ten funds, listed in order of the magnitude of their net annual fund operating expenses changes:

  • Stock Index Fund: six bps (old ratio) to nine bps (new);
  • Money Market Fund: nine bps to 15 bps;
  • Social Choice Equity Fund: eight bps to 22 bps;
  • Bond Fund: ten bps to 35 bps;
  • Growth Equity: 26 bps to 52 bps;
  • Large-Cap Value Fund: 25 bps to 52 bps;
  • Growth & Income Fund: 23 bps to 52 bps;
  • International Equity Fund: 30 bps to 60 bps;
  • Real Estate Securities Fund: 26 bps to 58 bps;
  • and Small-Cap Equity Fund: 11 bps to 55 bps.


    Dated March 25, 2010
    to the May 1, 2009 Prospectus

    Scott C. Evans
    President, TIAA-CREF Life Funds
    President, Teachers Advisors, Inc.

    March 25, 2010

    Dear Variable Contract Holder with Allocations to the TIAA-CREF Life Funds:

    We are writing to inform you that at a special meeting on March 23, 2010, shareholders of the ten TIAA-CREF Life Funds (the “Life Funds”) approved a new investment advisory agreement for the Life Funds, which will result in an increase in their fee rates on May 1, 2010. Our records indicate that your annuity contract(s) or life insurance policy(ies) has allocations to one or more of the Life Funds.

    The purpose of the increase is to more accurately reflect the costs of managing and servicing the Life Funds. These Funds will still be competitive with those of other similar low-cost mutual funds that serve as underlying investment options for insurance company separate accounts. The change includes breaking out non-advisory expenses from advisory expenses, which is the industry standard.

    What happens next?

    You do not need to take any action; the new investment advisory agreement and the related expense increases for the Life Funds will take effect on May 1, 2010 and the changes will be reflected in the new May 1, 2010 prospectus that you will be receiving shortly. Until then, please see the Life Funds’ proxy statement posted at www.sec.gov/Archives/edgar/data/1068204/000119312510007971/ddef14a.htm for more information on these changes. Be assured of our commitment to operating low-cost, high-value mutual funds and to making sure you will continue to enjoy the same account features and benefits that you now have.

    Our goal is to keep you informed about your investments with TIAA-CREF. As always, we value our relationship with you and are committed to helping you plan for—and reach—your long-term financial goals. If you have any questions, please call 877 825-0411 Monday through Friday, 8:00 a.m.–6:00 p.m. (ET).

    Thank you for your continued investment with TIAA-CREF.

    Scott C. Evans
    © 2010 Teachers Insurance and Annuity Association–College Retirement Equities Fund (TIAA-CREF), New York, NY 10017-3206 

    Edited by: Neil Anderson, Managing Editor

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