TIAA, Morningstar lawsuit alleges costly annuity abuses

A new lawsuit against TIAA supports the kinds of annuity abuses that a new fiduciary standard for retirement advisers is meant to prevent.

A purported class action filed Monday in federal court in New York charges Teachers Insurance and Annuity Association of Americaor TIAA, and financial services firm Morningstar to develop a system that steers retirement savers toward expensive annuity products without regard to their individual needs and goals. At the center of the lawsuit, filed on behalf of four current or former university employees, is a system called the Retirement Advisor Field View tool, which the defendant firms designed to provide retirement and investment advice.

The complaint alleges that the system was secretly designed to direct retirement savings to TIAA’s two most profitable products: the TIAA Traditional Annuity and the TIAA Real Estate Account. The Retirement Advisor field visualization system, according to the process, was coded to place the TIAA Traditional Annuity in six out of seven recommended retirement plans, regardless of an individual client’s needs and goals. And the TIAA Real Estate Account, an annuity product built into real estate investments, was awarded an 8 percent to 9 percent allocation in each saver’s plan, according to the lawsuit.

The suit alleges that the scheme came about after TIAA realized nearly a decade ago “that its market share of retirement plan services was eroding, that demographic trends would soon lead to a steep decline in revenue, and that its flagship product, TIAA Traditional. Annuity, recorded negative net asset flows.”

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Many of the abuses, according to the suit, stemmed from TIAA’s position as recordkeeper for retirement plans. Beginning in 2023, the complaint alleges, TIAA directed its financial advisors to contact approximately 655,000 savers whose investment portfolios were deemed “underweight” in the company’s annuity products. The suit said those consultants’ annual bonuses were tied to their ability to convince clients to invest in the TIAA Traditional Annuity or TIAA Real Estate Account.

A TIAA spokesman said the lawsuit lacks merit and said the firm plans to defend itself “vigorously.” He said TIAA supports its Retirement Advisor Field View system, which recommends only products selected by sponsors of employer-provided retirement plans.

“TIAA representatives must adhere to the tool’s recommendation and are trained to do so,” the spokesperson said in an email. “Furthermore, we take our regulatory compliance and disclosure obligations very seriously and provide clients with requested disclosures regarding fees and conflicts of interest.”

A Morningstar spokesman said the firm does not comment on ongoing litigation.

The lawsuit comes amid a prolonged and heated debate about o recently adopted Labor Department regulation intended to subject retirement plan advisors to heightened fiduciary duties to always put savings’ interests first. The rule, approved in April and now pending due to court challengesgenerally requires advisers to do what is best for clients when recommending the purchase of certain insurance products or that assets be transferred from employer-sponsored 401(k)s to other types of retirement accounts.

It also calls for retirement advice to avoid investments that involve excessive fees. This provision has particularly concerned annuity providers, whose sales can generate significant commissions for insurance companies.

Despite the sometimes high costs, annuities have become popular among retirees in recent years, largely because of the guaranteed income streams they offer retirees. Value of Annuity Sales reached $113.5 billion in the first quarter of 2024an increase of 21% year-on-year.

Even before the DOL’s new rule, retirement advisors already had a fiduciary duty to always look out for savers’ interests in many cases. But the Employee Retirement Income Security Act of 1974 contains an exemption for “single advice.”

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

“It would have applied fiduciary duties and ideally eliminated this or substantially reduced the harm and protected pension savings,” he said.

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

“It’s aimed more at the schmo who gets retirees to turn over their 401(k)s and take the money and invest it in illiquid insurance products like fixed annuities,” he said. “While it is broad enough, it would cover both situations.”

The suit against TIAA and Morningstar alleges that the firms breached that fiduciary duty by failing to adequately disclose their conflicts of interest and the fees they would generate by recommending certain products.

Moreover, they accuse the firms of having committed prohibited transactions and of receiving undue profits. Among other things, the plaintiffs seek restoration of “all losses resulting from each breach of fiduciary duty and, if not, restoration of the plans to the position they would have occupied but for the breach of fiduciary duty.”

This isn’t the first time TIAA has faced similar allegations. In 2021, TIAA-CREF Individual and Institutional Firm Services reached a $97 million settlement with the SEC over allegations that it failed to disclose conflicts in retirement renewal recommendations.

And in February, he agreed to pay $2.2 million to the Financial Industry Regulatory Authority after he was accused of violating the Best Interest of brokerage industry regulations by failing to inform clients of lower-cost alternatives to the mutual fund products he was recommending. Reg BI generally requires brokers to do what is best for their clients and to disclose conflicts of interest.