Frequently Asked Questions about the College Retirement Equities Fund (CREF) Multi-Class Structure

Transcription

1 Frequently Asked Questions about the College Retirement Equities Fund (CREF) Multi-Class Structure Created specifically for advisors Table of Contents Topic Page General Information... 1 Fees/Expenses... 2 Eligibility Criteria... 3 Communications... 4 CREF-Specific Information... 4 General Information Q: What change took place? A: On April 24, 2015, each of the eight CREF Accounts expanded to three classes: the previous class (renamed to ) plus two new classes R2 and R3. Each of the three classes have different expense ratios. However, the investment strategy, objective and risk profile for each Account remain the same. Q: Why was this change made? A: Originally CREF had a single-class structure, which means it had the same expense ratios across employer-sponsored and individual plans/products of all sizes. We created multiple classes to better align our expense structure with the costs of serving a wide range of clients and participants. With a desire to be at the forefront of market trends, this transformation of CREF to a multi-class structure makes us more competitive. Q: When did the change take place? A: April 24, Q: Why did we do this now? A: Market and competitive trends drove the CREF transition to a multi-class structure. Regulatory changes, such as the Pension Protection Act of 2006, have heightened the focus of plan fiduciaries on fees, added to competitive pressures in the market and encouraged a move to plan-based pricing. The ability to more accurately allocate administrative and distribution (A&D) expenses to the specific classes of clients to which these expenses relate was a significant driving force behind CREF s implementation of the multiple-class system.

2 Fees/Expenses Q: How did this change affect the expenses charged to CREF Accounts? A: On April 24, 2015, three different classes were introduced for each current CREF Account, designated as, R2 or R3. If an institution offers CREF across multiple plans, all plans will have the same CREF class. Depending on the class in which a plan is placed, CREF Account expenses decreased, had little to no change, or increased. Q: What stayed the same even after this change was implemented? A: While each of the three classes have different expenses, the investment strategy, objective and risk profile for each CREF Account remained the same. Q: What are the components of the CREF expense ratio? A: The expense ratio consists of the following components: Investment Advisory expenses. These expenses generally include investment management, portfolio accounting and custodial services. Administrative expenses. These expenses include certain costs associated with recordkeeping and other services for retirement plans and other products (such as IRAs) that offer CREF. Distribution expenses. These 12b-1 fees are for all expenses associated with the provision of distribution services for the CREF contracts. Mortality and expense (M&E) risk charge. This charge guarantees that CREF participants transferring funds to TIAA for the immediate purchase of lifetime payout annuities will not be charged more than the rate stipulated in the CREF contract. Q: How did the expenses for the CREF Accounts change? A: The new class structure affected only the administrative and distribution expenses, which resulted in a different overall expense ratio for each class. The investment advisory expenses and mortality and expense (M&E) risk charge remained the same for each class. Q: How do CREF fees look relative to the market or benchmarks? A: According to Morningstar data,* the preliminary estimated expense ratios for the CREF Accounts are projected to be in the bottom quartile for equity and social choice Accounts and, excluding the money market funds, at or better than the 36th percentile for fixed income Accounts. * Applies to mutual fund and variable annuity expense ratios. Source: Morningstar Direct, March 31, Our mutual fund and variable annuity products are subject to various fees and expenses, including, but not limited to, management, administrative and distribution fees; our variable annuity products have an additional mortality and expense risk charge. Q: Does CREF expect to collect any additional revenue as a result of multi-classing? A: No. CREF does not collect any additional revenue as a result of multi-classing. CREF is an at-cost product and remains so after multi-classing. Clients and individual plans/products have different expenses that are better aligned to the cost of administering them. Q: How did TIAA-CREF make this change? A: TIAA-CREF took a very thoughtful approach to this significant change in CREF s structure, and early in the process, we sought necessary regulatory approvals from the SEC and the appropriate state insurance departments, as well as from the CREF Board with respect to various aspects of our multi-classing project. With approvals in place, we implemented an extensive communications plan, including providing participants and plans with advance notices of the changes that took place as a result of multi-classing. Q: Does this have any impact on fee billing? A: No. Any existing fee billing arrangement between individuals and their advisors was not impacted. Q: What impact did this have on the client s revenue credit account? A: Based on the class the plan sponsor s plan is designated and the plan services expense associated with that class, the revenue credit account may be affected. Our Relationship Managers are working with you and the plan sponsor to determine that effect. Frequently Asked Questions about the CREF Change 2

3 Q: Why was there a decrease in the plan services expense, also known as the recordkeeping offset, for R2 and R3 clients? A: The plan services expense is intended to reflect the portion of the expense ratio revenue that is used to offset the cost to provide plan services, including recordkeeping. Recordkeeping costs and plan servicing costs across all clients have seen a decline over the past five years. TIAA-CREF is now better reflecting that in the recordkeeping offset for all three CREF classes. Q: Why was there an increase in the plan services expense, also known as the recordkeeping offset for clients? A: Generally, it costs more to administer smaller plans than larger plans which can take advantage of economies of scale. Q: Why was the reduction of the plan services expense not in proportion to the reduction in the expense ratio? A: The change in the plan services expense reflects the approximate expenses for the different groups of clients eligible for each class. It enables TIAA-CREF to better reflect the revenue we collect to cover the recordkeeping and servicing expenses for each class. Q: What percentage of participants were impacted and what was the range of fees that would be increased? A: The change affected all participants who have access to CREF. For more information on the impact to fees, please reference the 408(b)(2) fee disclosure provided to your plan sponsor. Eligibility Criteria Q: What were the criteria for determining the CREF class for an institution? A: CREF classes were designated based on an institution s total assets in CREF Accounts across all plans as follows: Total CREF Assets Less than $20 million CREF Class $20 million up to $400 million R2 $400 million or more R3 The CREF class for the initial implementation was determined based on assets under management as of October 31, 2014, but the change did not take place until April 24, A review process will take place at least annually to evaluate eligibility. Q: Will an institution s class change in the future if total institutional client assets cross certain thresholds? When would that happen? A: According to our current plan (which is subject to change), we will not be moving clients or plans/products to a more expensive CREF class after implementation if assets decrease below a threshold. We will review eligibility at least annually for clients that may qualify for a cheaper class of CREF. Q: Why was eligibility for the new class designations set by asset level? A: It is standard practice in the financial services industry to determine eligibility for different classes based on the amount of client assets. This is also consistent with the current fee fairness trend in the marketplace to base classes on plan size. For example, administering a plan with greater assets under management can take advantage of economies of scale. Q: Did this change happen automatically? A: Yes. Assets in a CREF Account at the time of the change were automatically placed into their newly designated class. And all future contributions will also be in the newly designated class. Q: Can an institution opt-out of this change? Or change its CREF class? A: No. An institution s class was based on the institution s total CREF assets under management across all of their plans as of October 31, Q: Are any of TIAA-CREF s individual plans/products affected? A: Yes. The new CREF classes impact CREF assets held in retirement plans at current and previous employers, as well as any individual plans/products employees may have as shown below: Plan/Product Investment Solutions IRA Keogh After-Tax Retirement Annuity (ATRA) Savings and Investment Plan (SIP) Accumulation Unit Deposit Option (AUDO) New Class Into Which It Was Placed R2 R3 R3 Frequently Asked Questions about the CREF Change 3

4 Q: How are annuitants affected? A: CREF Accounts from which annuitants receive annuity income were placed in R3 (the least expensive class), no matter what their class designation was in their institutional retirement plan(s) or individual plans/products before they annuitized. Communications Q: Why did you mail fee disclosure information to participants of plans not subject to ERISA? A: This is material information that all participants need to know, regardless of whether their plan is subject to ERISA. Q: If I have other questions, whom can I contact? A: You can contact your TIAA-CREF Consultant Relations or Advisor Services Representatives. CREF-Specific Information Q: Can you provide some background about CREF? A: Following is a brief history of TIAA-CREF to give you a better perspective on what changed and why: TIAA began providing fixed-income annuities in In 1952, we pioneered the use of equity investments as a way of building retirement assets. These equity investments became America s first variable annuity, the College Retirement Equities Fund, or CREF. Today CREF consists of eight Accounts which offer participants broad asset class diversification to help them achieve their retirement needs and goals. Q: What are the eight CREF Accounts? A: The eight core options listed below offer exposure to the major market segments: 1. CREF STOCK ACCOUNT (Inception: 1952): through capital appreciation and investment income by investing primarily in a broadly diversified portfolio of common stocks. 2. CREF GLOBAL EQUITIES ACCOUNT (Inception: 1992): through capital appreciation and income from a broadly diversified portfolio that consists primarily of foreign and domestic stocks. 3. CREF GROWTH ACCOUNT (Inception: 1994):, mainly through capital appreciation, primarily from a diversified portfolio of common stocks that present the opportunity for exceptional growth. 4. CREF EQUITY INDEX ACCOUNT (Inception: 1994): from a diversified portfolio selected to track the overall market for common stocks publicly traded in the United States, as represented by a broad stock market index. 5. CREF BOND MARKET ACCOUNT (Inception: 1990): primarily through high current income consistent with preserving capital. 6. CREF INFLATION-LINKED BOND ACCOUNT (Inception: 1997): This Account seeks a long-term rate of return that outpaces inflation, primarily through investment in inflation-indexed bonds (fixed-income securities whose returns are designed to track a specific inflation index over the life of the bond). 7. CREF SOCIAL CHOICE ACCOUNT (Inception: 1990): that reflects the investment performance of the financial markets while giving special consideration to certain social criteria. 8. CREF MONEY MARKET ACCOUNT (Inception: 1988): This Account seeks higher current income consistent with maintaining liquidity and preserving capital. Frequently Asked Questions about the CREF Change 4

5 Q: How have the CREF Accounts performed? A: Seventy-one percent of the CREF variable annuity Accounts received an overall Morningstar rating of 4 or 5 stars (as of March 31, 2015, 47.95% have 4 stars and 23.29% have 5 stars).* And over the three-, five- and ten year periods, 87% of TIAA-CREF s variable annuity Accounts have met or exceeded their Morningstar median.** * Please note: Morningstar rates CREF group variable annuities within the open-end mutual fund universe. Current rankings may be higher or lower on a monthly basis. Morningstar is an independent service that rates mutual funds and variable annuities. The top 10% of accounts in an investment category receive five stars, the next 22.5% receive four stars, and the next 35% receive three stars. Morningstar proprietary ratings reflect historical risk-adjusted performance and can change every month. They are calculated from the account s three-, five- and ten-year average annual returns in excess of 90-day Treasury bill returns with appropriate fee adjustments, and a risk factor that reflects subaccount performance below 90-day T-bill returns. The overall star ratings are Morningstar s published ratings, which are weighted averages of its three-, five- and ten-year ratings for periods ended March 31, Past performance cannot guarantee future results. For current performance and rankings, please visit ** The Morningstar median represents the midpoint of an index of comparable funds/accounts grouped by factors such as investment objective and asset class. Q: How are the CREF Annuity Accounts different from mutual funds? A: CREF is a variable annuity and not a mutual fund. The CREF Annuity Accounts are designed to help provide participants with lifetime retirement income. In addition, the CREF Annuity Accounts are low cost when compared to other comparable mutual funds. And these Annuity Accounts can be converted into an income stream that can provide annuity payments for a specific number of years or even for a lifetime. Lifetime income provided through CREF Annuities will vary depending on product performance and is subject to TIAA-CREF s claims-paying ability. You should consider the investment objectives, risks, charges and expenses carefully before investing. Go to tiaa-cref.org for product and fund prospectuses that contain this and other information. Please read the prospectuses carefully before investing. TIAA-CREF Individual & Institutional Services, LLC, Teachers Personal Investors Services, Inc., and Nuveen Securities, LLC, members FINRA and SIPC, distribute securities products. Annuity contracts and certificates are issued by Teachers Insurance and Annuity Association of America (TIAA) and College Retirement Equities Fund (CREF), New York, NY. Each is solely responsible for its own financial condition and contractual obligations. Advisory services are provided by Advice & Planning Services, a division of TIAA-CREF Individual & Institutional Services, LLC, a registered investment adviser. TIAA-CREF products may be subject to market and other risk factors. See the applicable product literature, or visit tiaa-cref.org for details. Investment, insurance and annuity products are not FDIC insured, are not bank guaranteed, are not deposits, are not insured by any federal government agency, are not a condition to any banking service or activity, and may lose value Teachers Insurance and Annuity Association of America-College Retirement Equities Fund (TIAA-CREF), 730 Third Avenue, New York, NY C _ (03/15)