Getting the most from your TIAA-CREF retirement plan
EDITOR’S NOTE: To gain the fullest benefit from this article, we suggest you also read “How to maximize your 401(k) investments.”
by Paul Merriman
Thousands of local and regional school districts, colleges and universities have retirement programs based on funds provided by TIAA-CREF. Not all these plans are the same, so it’s impossible to make specific recommendations for every one.
My general recommendations, which you’ll find at the end of this article, will cover many situations. But to maximize your own plan, you will need to evaluate the specific options available to you. I’ll outline the process I use for evaluating a 401(k) program’s investment choices. I recommend you use the same process with your own plan.
TIAA-CREF manages so much money and has been doing it for so long that it could easily offer dozens of retirement fund choices and cover all the important asset classes I believe investors should have to assure their long-term financial futures. But TIAA-CREF too often does just the opposite, offering only a handful of options that represent relatively few asset classes. (This is not particularly unusual.)
Several years ago, TIAA-CREF offered two or three uniform retirement plan products, and it would have been easy to make an allocation recommendation for each one.
Today, TIAA-CREF offers a menu from which plan administrators can choose the options they make available to employees. Many plans are built on one of two basic lists that include institutional mutual funds not available to the public. Some states restrict which options can be offered. Some trustees add choices from other fund families such as Vanguard.
Because these plans can be so diverse, the best I can do is make general recommendations based on the most common investment options.
BASIC LIST
The first basic list contains only six equity options: Stock (large blend), Global Equities (large blend, U.S. and international), Growth (large growth), Equity Index (large blend), Social Choice (large blend) and Real Estate.
When we evaluate a list of plan options, we start by looking for the best choices in each asset class we want. Here’s how that works out in this TIAA-CREF basic plan.
U.S. large-cap blend: This plan has three such funds. Our choice is the Equity Index fund, which is the least expensive and most inclusive.
U.S. large-cap value: There is no offering here.
U.S. small-cap blend: There is no offering here.
U.S. small-cap value: There is no offering here.
Real estate: There’s one choice here, and we’ll use it.
International large-cap: There’s no pure international fund. The only way in this plan to get even limited international exposure is in the Global Equities fund, which I believe includes a substantial position in large-cap U.S. stocks.
International large-cap value: There is no offering here.
International small-cap blend and small-cap value: There are no options here, nor any in emerging markets.
This leaves investors no way to get proper diversification. Everything is overweighted in large-cap U.S. stocks.
| Recommendations, basic TIAA-CREF plan | |
| Fund | Percent of equity portfolio |
| CREF Equity index fund | 50% |
| CREF Global equities fund | 40% |
| TIAA Real estate fund | 10% |
For the fixed-income part of the allocation, I would use a 50/50 combination of the CREF Bond Market fund, which I believe will perform similarly to a total bond market index, and the CREFF Inflation-Linked Bond Fund, which I believe will perform similarly to a short-term corporate bond fund.
On the equity side, this leaves us with almost no exposure to either small-cap equities or value equities and very limited exposure to international equities. Employees who follow this allocation should use their IRA and taxable accounts to beef up their exposure to those areas.
EXPANDED LIST
The second and longer TIAA-CREF list, which is gradually being introduced into many plans, contains 18 equity choices, including nine index funds.
Our recommendations use the index funds in our favored asset classes, with these two exceptions. First, the only real estate fund in this plan is not an index fund, but we’d use it anyway to get this exposure. Second, the plan offers no U.S. small-cap value fund; we’ve substituted the mid-cap value fund in order to get value exposure along with at least some of the benefit of investing in smaller companies.
This lineup has only a single international fund, heavily weighted to large-cap stocks. This leaves out international small-cap stocks and international value stocks, but it’s still a significant improvement over the basic list’s global equity fund. Because there’s only one international fund, I recommend limiting international investments to 30 percent.
| Recommendations, expanded TIAA-CREF plan | |
| Fund | Percent of equity portfolio |
| TIAA-CREF S&P 500 Index | 15% |
| TIAA-CREF large-cap value index fund | 15% |
| TIAA-CREF mid-cap value index fund | 15% |
| TIAA-CREF small-cap blend index fund | 15% |
| TIAA-CREF international equity index fund | 30% |
| TIAA-CREF real estate securities fund | 10% |
For the fixed-income part of the allocation, I would use the same 50/50 combination of the CREF Bond Market fund and the CREFF Inflation-Linked Bond Fund.
Employees who follow this allocation should use their IRA and taxable accounts to beef up their exposure to U.S. small-cap value stocks, international small-cap stocks and international value stocks.
For further reading:
The following articles at FundAdvice.com should prove helpful:
- ‘The Ultimate Buy and Hold Strategy’ tells why we recommend what we do. Its principals are not complicated, and once you understand them you will know more about investing than most people ever do.
- ‘Fine Tuning Your Asset Allocation’ tells why you should control the risk of an investment portfolio and tells you how to do it.
I also recommend the following retirement-related articles:
- ‘Retirement: When Your Portfolio Starts Paying You’
- ‘The Best Mutual Funds in the World’
- ‘Retirees: Earn Lower Returns, Have More Money’
