2/29/08
TIAA-CREF TRADITIONAL ANNUITY CONTRACT 2007 LEGISLATION - OPTIONAL RETIREMENT PROGRAM
Question: For University employees who have funds invested in the TIAA Traditional Annuity under the State University System Optional Retirement Program and wish to transfer to the Florida Retirement System or to the Public Employee Optional Retirement Program under Section 121.35(3)(i), is it possible to get a waiver / exception from TIAA that would allow an immediate payout? 2007 Florida Enactment - Section 121.35(3)(i): Effective January 1, 2008, through December 31, 2008, except for an employee who is a mandatory participant of the State University System Optional Retirement Program, an employee who has elected to participate in the State University System Optional Retirement Program shall have one opportunity, at the employee's discretion, to choose to transfer from this program to the defined benefit program of the Florida Retirement System or to the Public Employee Optional Retirement Program, subject to the terms of the applicable contracts of the State University System Optional Retirement Program. (Italics added) Questions of Miscommunication or Misunderstanding by Participants – On the face page of the Retirement Annuity Contract, it states that “You can not withdraw or transfer your Traditional Annuity accumulation in a lump sum.” There is also a “30-Day Right to Examine Your Contract” for those who want to rescind their contract. If necessary, copies of the signed applications can be provided. In addition, on January 28, 2008, a letter was sent to each participant from Chris Lynch at TIAA-CREF specifically to inform them of the transfer option but reminding them, “However, you must make transfers from the TIAA Traditional Annuity in 10 annual installments.” Participants were also given an 800 number in case of questions. TIAA’s Retirement Annuity (RA) Contract – The RA Contract is TIAA’s oldest product, constituting the company’s basic pension funding offering since 1918. The RA was the sole defined contribution annuity product offered by TIAA from 1918 until 1973. Currently the RA provides a fixed general account option (the Traditional Annuity) and a Real Estate separate account. The RA remains a core part of TIAA’s portfolio with Traditional Annuity accumulations as of December 31st, 2007 representing more than half of TIAA’s total general account contract liabilities. Unique Nature of the RA Product – The RA contract is used to fund the company’s core market of defined contribution pension plans. This product is somewhat unique in the industry in that the Traditional Annuity (fixed) option does not provide for lump-sum cash withdrawals. Disbursements from the Traditional Annuity can only be in the form of life annuities or as a series of ten
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annual installments. This product design has proven extremely valuable over the years as a solid foundation upon which to fund pension benefits. Holders of RA contracts benefit from the absence of cash values because TIAA is able to pursue a long-term investment strategy, which has consistently, and over time, provided some of the most competitive rates in the industry. Rationale for the Absence of Immediate Cash Values - TIAA’s ability to pursue its existing investment strategy on this product line is critically linked to the absence of cash values. Moreover TIAA’s ability to maintain this strategy (and arguably the company’s financial stability) precludes the company from allowing any exceptions to it. This is driven by two factors: (1) Non-Discrimination Laws - Non-discrimination laws prevent an insurer from administering the same product in different ways for different groups of contract holders unless there is a legitimate basis for distinguishing between the financial risks associated with particular groups. Even when such basis exists, the ability to provide different treatment among groups generally calls for distinguishing characteristics within the actual content of the respective contracts delineating which treatment would apply to which groups of contract holders. In this instance TIAA is dealing with hundreds of thousands of virtually identical RA contracts in force nationwide that would be exposed to challenges of discriminatory treatment if a particular subset of Florida ORP contract holders was provided with cash rights. (2) State Nonforfeiture Laws - Although Florida is positioned somewhat differently, 48 other states have in place a form of the Standard Nonforfeiture Law for Individual Deferred Annuities, including New York, our domiciliary state. The impact of these laws is that for all contracts that come under the authority of these states, if cash withdrawals are permitted at all, then they must be available all the time. This intensifies the concerns related to non-discrimination as any challenge to the RA product’s non-cashability outside of Florida exposes the entire product line to the legal demand for cash based on the Annuity Nonforfeiture law. Adverse Impact of Immediate Cashability - The financial stability of the company is tied to this position. If any RA contracts were to be provided with any form of cash surrender right, it is only a small extension that would bring the demand for cash to other RA contract holders. Moreover, any such extension would arguably entitle all RA contract holders to a cash surrender benefit any time thereafter. In would not be far-fetched for other Florida RA contract holders to go to court and claim cash rights by way of non-discrimination. This in turn could easily prompt contract holders in other states to use this against TIAA emboldened by the implications of the Annuity Nonforfeiture Law .Since TIAA’s contract holder population is fairly sophisticated and communicative, such scenarios could easily play out in very short periods of time.
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Solvency Implications - The exposure of all TIAA’s RA accumulation to discretionary withdrawal could, under certain circumstances, threaten the solvency of TIAA. Certainly in the current interest rate environment, it is not difficult to imagine rapid increases in interest rates that would incent all RA policyholders to utilize such surrender rights in order to take advantage of temporary rate increases. We cannot take the risk. Similar Requests by Participants in Other States – While similar requests have been made by participants in other states, the company has relied upon its contract language and the points outlined above in maintaining the same position there as it has in this instance. No exceptions have been made.
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