TIAA, Morningstar lawsuit alleges costly annuity abuses

A new lawsuit against TIAA is alleging the sorts of abuses with annuities that a new fiduciary standard for retirement advisors is intended to prevent.

A putative class action filed on Monday in federal court in New York accuses the Teachers Insurance and Annuity Association of America, or TIAA, and the financial services firm Morningstar of developing a system that directed retirement savers into expensive annuity products without taking into account their individual needs and goals. As the heart of the suit, filed on behalf of four current or former university employees, is a system called the Retirement Advisor Field View tool, which the defendant firms devised to provide retirement and investing advice.

The complaint alleges the system was secretly designed to direct retirement savers into TIAA's two most-lucrative products: the TIAA Traditional Annuity and the TIAA Real Estate Account. Retirement Advisor Field View system, according to the suit, was coded to place the TIAA Traditional Annuity in six out of seven recommended retirement plans, regardless of an individual customer's needs and goals. And the TIAA Real Estate Account, an annuity product built in real estate investments, was given an 8% to 9% allocation in every saver's plan, according to the suit.

The suit alleges that the scheme arose after TIAA realized nearly a decade ago "that its share of the market for retirement plan services was eroding, that demographic trends would soon lead to a steep drop in revenues, and that its flagship product, the TIAA Traditional Annuity, was experiencing negative net asset flows."

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Many of the abuses, according to the suit, stem from TIAA's position as a recordkeeper for retirement plans. Since 2023, the complaint alleges, TIAA has directed its financial consultants to reach out to roughly 655,000 savers whose investment portfolios were deemed "underweight" in the firm's annuity products. The suit said those consultants' annual bonuses were tied to their ability to persuade clients to invest in the TIAA Traditional Annuity or TIAA Real Estate Account.

A spokesperson for TIAA said the suit is without merit and said the firm plans to defend itself "vigorously." He said that TIAA stands by its Retirement Advisor Field View system, which only recommends products selected by sponsors of employer-provided retirement plans. 

"TIAA representatives are required to adhere to the tool's recommendation and are trained on this," the spokesperson said in an email. "Additionally, we take our regulatory compliance and disclosure obligations very seriously and provide clients required disclosures around fees and conflicts of interests."

A Morningstar spokesperson said the firm doesn't comment on ongoing litigation. 

The suit comes amid protracted and heated debate over a recently adopted Department of Labor rule meant to subject retirement plan advisors to heightened fiduciary obligations to always put savers' interests first. The rule, approved in April and now on hold because of court challenges, generally calls on advisors to do what's best for clients when recommending the purchase of certain insurance products or that assets be rolled over from employer-sponsored 401(k)s to other types of retirement accounts.

It also requires that retirement recommendations avoid investments carrying excessive charges. That provision has been of particular concern to providers of annuities, whose sales can generate hefty commissions for insurance companies.

Despite their sometimes high costs, annuities have become popular among retirees in recent years in large part because of the guaranteed income streams they offer retirees. The value of annuity sales hit $113.5 billion in the first quarter of 2024, a 21% year-over-year increase.

Even before the adoption of the DOL's new rule, retirement advisors were already under a fiduciary obligation to always look out for savers' interests in many cases. But the Employee Retirement Income Security Act of 1974 contains an exemption for "one-time advice."

That allowed retirement advisors to claim to not be fiduciaries when they were recommending one-time purchases of annuity products or 401(k) rollovers. By closing that loophole, the new DOL rule would go a long way toward preventing abuses of the sort alleged in the suit against TIAA and Morningstar, said Michael Edmiston, a former president of the Public Investors Advocate Bar Association and a securities lawyer at Jonathan W. Evans & Associates in Studio City, California.

"It would have applied fiduciary duties and, ideally, would have eliminated this or substantially reduced the harm and protected retirement savers," he said. 

Hugh Berkson, a partner at Cleveland-based McCarthy Lebit Crystal & Liffman and another former president of the Public Investors Advocate Bar Association, said the scheme that TIAA and Morningstar are accused of running is certainly more complicated than the one-off sales dealt with in the new DOL rule.

"It's more aimed at the schmo who is out there convincing retirees to turn over their 401(k)s and take the money and invest it in illiquid insurance products like fixed annuities," he said. "Although it's broad enough, it would cover both situations."

The suit against TIAA and Morningstar alleges the firms violated that fiduciary duty by not adequately disclosing their conflicts of interest and the fees they would generate from recommending certain products.

It further accuses the firms of committing prohibited transactions and of receiving ill-gotten profits. Among other things, the plaintiffs are seeking the restoration of "all losses resulting from each breach of fiduciary duty and to otherwise restore the plans to the position they would have occupied but for the breaches of fiduciary duty."

This isn't the first time TIAA has been faced with similar accusations. In 2021, the firm's TIAA-CREF Individual & Institutional Services reached a $97 million settlement with the SEC over allegations that it had failed to disclose conflicts in retirement rollover recommendations. 

And in February, it agreed to pay the Financial Industry Regulatory Authority $2.2 million after being accused of violating the brokerage industry's Regulation Best Interest by failing to let clients know of lower-cost alternatives to mutual fund products it was recommending. Reg BI generally calls on brokers to do what's best for their clients and disclose conflicts of interest.