On July 13 the Securities and Exchange Commission and the Attorney General of New York State, in separate releases (https://www.sec.gov/litigation/admin/2021/33-10954.pdf and https://ag.ny.gov/sites/default/files/tiaa_aod_-_2021.07.13_-_fully_executed.pdf), announced findings that TIAA had violated federal securities law and state financial fraud law. As a result of these findings TIAA will pay a $97 million fine. The actions of TIAA described by these findings should be a cautionary tale for all plan fiduciaries.
Although the SEC and NYS findings focus on different aspects of TIAA’s actions, the basic facts and legal implications are the same:
- After experiencing an increased outflow of assets from the employer-sponsored plans recordkept by TIAA in the early 2000s, TIAA developed a strategic plan to increase TIAA’s individual investor services. One of these services was a managed account program (Portfolio Advisor). Fees for Portfolio Advisor varied but did go up to 1.15% of assets invested in these accounts. These fees far exceeded TIAA’s revenue from assets that remained in employer-sponsored plans.
- To market Portfolio Advisor TIAA expanded its sales force (referred to by TIAA as Wealth Management Advisors), expanding its salesforce to nearly 900 representatives.
- Wealth Management Advisors were paid significantly more for assets moved to Portfolio Advisor than they were for retention of assets in employer sponsored plans and failure to accumulate sufficient assets in Portfolio Advisor could result in disciplinary action or termination.
- In order to increase the assets invested in Portfolio Advisor TIAA engaged in a litany of deceptive practices; these deceptive practices were centered around the Wealth Management Advisors. The deceptive practices identified included statements that:
- Wealth Management Advisors provided “objective advice” and “acted solely in the client’s best interests.”
- Wealth Management Advisors were “salaried, non-commissioned.”
- Wealth Management Advisors acted in a fiduciary capacity, which the Advisor claimed helped to avoid the conflicts of interest presented by competitors who were not fiduciaries.
As noted by New York State:
These statements were false and misleading. TIAA’s Advisors were neither objective nor disinterested. Rather, they had significant incentives – through financial compensation, supervisory pressure, and disciplinary processes – to recommend that clients roll over assets into Portfolio Advisor accounts. Furthermore, when reviewing Advisors’ recommendations, TIAA Services did not confirm whether those recommendations were actually in clients’ best interests, but instead treated them as subject only to the less rigorous “suitability” standard.
- As further noted by New York State “When recommending Portfolio Advisor, Advisors also presented investors with an incomplete and misleading comparison of their options, particularly the option of retaining assets within their employer-sponsored plans.” The representations about the employer-sponsored plans were misleading in a number of ways–including the fact that many of the advertised features of Portfolio Advisor were also available for free in clients’ employer-sponsored plans
- Other TIAA activities that were found to represent violations included (i) use of data obtained in providing “free financial planning services” in order to discover participants’ “pain points” that would then be used in promoting sales of Portfolio Advisor, and (ii) engaging in a “hat switch” where Wealth Management Advisors start a relationship (or sales process) acting in a fiduciary capacity–and then switch to activities that TIAA treated as non-fiduciary (such as recommending that a participant roll over assets from an employer-sponsored plan into portfolio advisor) without disclosing to the participant that the Wealth Management Advisor was switching hats and acting under a different (and lesser) standard.
The SEC and New York State imposed different penalties on TIAA. Most notably:
- Under the SEC settlement–
- TIAA will pay $97 million to the SEC ($74 million in disgorgement, $14 million in pre-judgement interest and a $9 million civil penalty). TIAA is then required to establish a fund to compensate individuals who established Portfolio Advisor accounts opened with rollover assets from employer plans recordkept by TIAA.
- Within 30 days of the order (i.e., August 12) TIAA will notify current and former clients affected by TIAA’s misconduct of the settlement. The notice will consist of the SEC’s order and a cover letter.
- TIAA also undergo an internal review of communication and training.
- Under the New York State settlement TIAA shall:
- “continue to treat all recommendations to roll over assets from employer sponsored plans to managed accounts as investment adviser activities subject to a fiduciary duty”.
- “eliminate or fully disclose in plain language any Advisor conflicts in recommending managed accounts”
- “provide clients with plain-language written disclosures that clearly delineate which Advisor activities and recommendations are investment adviser activities subject to a fiduciary duty and which are broker-dealer activities not subject to a fiduciary duty”
- “provide clients with plain-language oral disclosures in real time to ensure that clients are adequately informed any time an Advisor is no longer acting as a fiduciary”
- “train Advisors to offer a fair comparison between managed accounts and employer-sponsored plans recordkept by TIAA (“Plan” or “Plans”) and shall monitor Advisors’ compliance with this requirement”.
TIAA is also required to undergo ongoing oversight and supervision by New York State.
Let’s Not forget Data
In addition to TIAA’s active misrepresentations, the orders also describe TIAA’s misuse of participant data. As described in the NYS order:
The first step of the Sales Process was for Advisors to cold-call preselected participants in TIAA-administered employer sponsored retirement plans to offer free financial planning services. These services were often described as included in, or a benefit of, the investor’s retirement plan. If an investor accepted the offer, Advisors held a “discovery” meeting with the client to gather information about the client’s finances, goals, and risk profile.
TIAA Services trained Advisors to use the discovery meeting to uncover “pain points” that could be used to help motivate an investor to make changes to their financial portfolio. Under the Sales Process, Advisors were coached to frame the discussion around four financial planning challenges … and to get the client to “self-realize” that they needed help in one or more of these areas. Some Advisors expressed discomfort with this approach, describing it as a form of “fear selling.”
Attorneys and courts are currently arguing over whether participant data should be considered a plan “asset” that must, under ERISA, be used for the exclusive benefit of participants. TIAA’s use (and misuse) of plan data highlights why the concept of plan assets needs to move forward from the 1970’s perspective that was in place when ERISA was enacted. After all, ERISA requires fiduciaries to act prudently in light of the current prevailing circumstances. These currently prevailing circumstances demonstrate the power of misused data to undermine employer-sponsored plans and highlight the need to hold the use of data to the same standard as the use of participants’ financial assets.
Drawing Some Lessons
Upon review of these orders — and placing these behaviors into the context of broader industry patterns — several observations come to mind:
- The SEC and NYS orders focused on individuals who rolled money over from an employer-sponsored plan record kept by TIAA into Portfolio Advisor. However, the orders make no reference to the participants who believed that Wealth Management Advisors were impartial and either (i) used other assets to invest in Portfolio Advisor (such as rollovers from a prior employer plan not record kept by TIAA or rollovers of a spouse’s distribution) or who (ii) purchased TIAA products other than Portfolio advisor (such as life insurance, annuities or 529 plans).
- The narrow focus of these orders may have been justified from a regulatory perspective–but from a broader perspective it overlooks the fact that misrepresentations made by TIAA representatives would have impacted a broader range of participant interactions.
- Similarly, the SEC and NYS orders make no provision for employees who have remained in their employer-sponsored plans (for now)–but for years have been misled about the advantages of Portfolio Advisor and have not been adequately educated about the advantages of leaving funds in their employer-sponsored plan upon incurring a distributable event. Accordingly, it is reasonable to believe that the misrepresentations made by TIAA over the years will affect future decisions–and nothing in these orders does anything to correct any of the misinformation.
- The orders’ focus on Wealth Management advisors is also too narrow. A broad swathe of TIAA employees who interact with plan participants (including phone-based representatives) are compensated based on the sales of TIAA products. These conflicts received no scrutiny in the orders and, although identified in TIAA’s ADV Part 2-A, they are often overlooked.
- It is worth noting that TIAA’s focus on Portfolio Advisor and Wealth Management Advisors began with TIAA’s concerns about the exodus of assets from employer-sponsored plans recordkept by TIAA. However, rather than undertake an initiative to enhance the attractiveness of employer-sponsored plans recordkept by TIAA–the recordkeeper created and promoted products to compete with the very same employer plans that retained TIAA as recordkeeper in the first place.
TIAA’s practices were manifestations of a deeper challenge. TIAA had two competing products–recordkeeping and investment advisory services. In light of the difference in profitability between these two products, TIAA had significant economic incentives to promote the product that was more lucrative for TIAA–the managed account.
In effect, the real conflict of interest was not the Wealth Management Advisors’ compensation structure. Rather, it was TIAA’s conflict between the recordkeeping business and the wealth management business and the managed account product. This larger conflict emerges across many recordkeepers–with a variety of products that compete with recordkept employer plans (including managed accounts, annuities, and retail mutual funds). When these conflicts occur, we can see employer-sponsored plans relegated to being a means to an end–a channel for feeding assets into these competing (and more profitable) products.
This larger conflict–and not TIAA’s specific violations–should be the lesson learned.