TIAA-CREF, a pension fund with a value of $200 billion, is looking to expand its reach into the state-run pension plans for teachers, which is a massive market. This decision comes after the company’s tax-exempt status was revoked due to a federal tax law change. Previously, the tax exemption prevented the fund from offering retirement plans to elementary and secondary teachers in public schools, except those at private schools. However, now all of the nation’s 3 million public school teachers can benefit from the fund.
Tom Pinto, a spokesperson for the New York City-based company, stated that they are exploring opportunities that were previously unavailable to them due to their tax exemption. One of these opportunities includes targeting the public K-12 market.
The Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF) was established in 1918 as a nonprofit, tax-exempt pension system. However, in 1986, the annuity portion of the business became taxable. The company recently lost a battle in Congress to maintain its tax-exempt status for its retirement business. Competitors argued that this status gave TIAA-CREF an unfair advantage. The company is now focused on mitigating the impact of this loss on its 1.9 million participants. The Wall Street Journal reported that this change could cost the pension fund up to $1.2 billion in the coming years, but Mr. Pinto emphasized that they are still assessing the extent of the loss and cannot confirm this figure. He did express confidence that the company’s dividend rates will remain among the highest in the industry.
Interestingly, the new taxes are not expected to affect individuals who have invested in CREF, which offers a variable annuity with various investment options. However, those who have invested in TIAA, an insurance company that provides a traditional annuity with a guaranteed minimum return and dividends, will be impacted.
The public K-12 sector is an ideal market for TIAA-CREF. Most public school teachers are currently covered by state-run benefit plans, which are managed by state officials and the investment firms they hire. However, some of these plans are facing significant deficits. On the other hand, optional or defined-contribution retirement plans allow individuals to have some control over how their money is invested. Forty-six states have passed laws that allow state employees to participate in optional retirement plans, and TIAA-CREF is a provider of such plans in 43 of these states. Mr. Pinto explained that while state legislation would typically be required for an optional retirement or defined-contribution plan to be offered to public K-12 employees, each state’s situation is unique, and in some cases, cities or local districts may be able to offer a defined-contribution plan without legislation being passed.