Investors are suing TIAA and Morningstar Investment Services for allegedly breaching their fiduciary duty by using a retirement tool that steered participants into TIAA’s two most profitable products.
The class-action suit, filed yesterday in U.S. District Court for the Southern District of New York, alleges that beginning in 2013 when TIAA realized that its share of the retirement plan market was declining, the firm and its broker-dealer subsidiary, TIAA-CREF Individual & Institutional Services LLC, worked with Morningstar to develop an advice tool to increase investments into the TIAA Traditional Annuity and TIAA Real Estate Account—the most profitable TIAA products, which were experiencing outflows.
This isn't the first time the asset management company has been sued over its retirement account recommendations. TIAA paid the Securities and Exchange Commission $97 million in 2021 to settle similar complaints filed by the regulator. Then again, in a settlement announced in February, the SEC said it ordered TIAA-CREF Individual & Retirement Services to pay more than $2.2 million for violating Regulation Best Interest in its IRA recommendations.
The lawsuit is based on a whistleblower report filed in June with the SEC that was first reported by NBC News.
The anonymous whistleblower alleged that TIAA misled clients by claiming to provide tailored investment advice to participants while failing to disclose that TIAA consultants earned commissions when investors changed their asset allocations based on the recommendations.
TIAA plans to contest the claims. TIAA spokesman Michael Tetuan said: “The lawsuit is without merit and TIAA will defend itself vigorously. We 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. 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 and provide clients required disclosures around fees and conflicts of interests,” Tetuan added.
Morningstar did not immediately respond to a request for comment.
The TIAA advice tool at the center of the controversy, known as the Retirement Advisor Field View (RAVF) tool, was developed in partnership with Morningstar and used by wealth consultants nationwide in their work with TIAA college and university plan participants. Historically, TIAA has been viewed as something of a model for other retirement planning operations, evidenced by the the comfortable retirement of college academics and university personnel.
But the consultants and TIAA did not adequately disclose that the tool was hardwired to choose the two TIAA products, according to the lawsuit, which was filed by plan participants Karen Kelley, Israel Barajas, Erin Englund and Christine Lightner on behalf of other affected investors.
“As part of the unlawful scheme, TIAA falsely represents to plan participants that the investment recommendations generated by the RAFV tool represent “unbiased,” “independent,” and “objective” advice from a trusted third party, Morningstar,” the plaintiffs alleged.
In reality, however, TIAA partnered directly with Morningstar to modify the tool to ensure that it always or nearly always recommended allocations to the TIAA Traditional Annuity and the TIAA Real Estate Account, the lawsuit alleged. “There are no alternative investment options available within the RAFV tool for their respective asset classes,” the lawsuit alleges.
While the products were unsuitable for some customers, especially seniors, the plaintiffs allege the costs of the products were especially troubling. “A prudent investment advisor also would have recognized that the fees charged by the RPPM managed account service were not reasonable for the services provided,” according to the lawsuit.
Plan participants who have agreed to adopt the RAFV tool’s investment recommendations “have been charged higher fees for products and services that underperformed comparable alternatives available through their employers’ tax-favored plans,” the plaintiffs allege.
In effect, participants would have been better off in a lower-cost alternative, such as a target-date fund or a balanced fund, according to the lawsuit.
“In 2023, ‘advice implementations’ using the tool were up 34% from the year before, resulting in more than $400 million in new investments to the TIAA Traditional Annuity. Morningstar has also benefited from the fees it receives as a subadvisor to the RA and RPPM services,” according to the lawsuit.
TIAA consultants who successfully switched participants into the two proprietary TIAA products not only received commissions on the investment switches, but also were awarded bonuses if they persuade at least 170 customers to switch, the whistleblower complaint and internal records show, according to NBC.
The class action is asking the court to restore the plans and participants to the position they would be in today if not for the alleged breaches of fiduciary duty, including restoring lost investment gains and unnecessary fees and commissions, as well as other equitable relief and attorneys’ fees.
Chris Tobe, chief investment officer of Hackett, Robertson & Tobe, an SEC-registered RIA, said both products were far more pricey and carried more risk than other alternatives cited in the lawsuit. “With a mutual fund or ETF, you own underlying stocks and bonds. Here you don’t own anything. TIAA owns it all You have a state contract claim. There is no transparency,” Tobe said.