Lawsuit Alleges TIAA, Morningstar, Pushed Participants Into Proprietary Annuities

Retirement plan participants have filed a class action lawsuit against TIAA and Morningstar for allegedly breaching their fiduciary duty by using a jointly created retirement planning tool to steer participants into TIAA investment products.

In a lawsuit filed Monday in U.S. District Court for the Southern District of New York, three plaintiffs alleged that a retirement tool—known as the Retirement Advisor Field View—developed by TIAA and Morningstar was designed to push participants in college and university retirement plans into TIAA annuity investment offerings through a TIAA financial consultant program or a managed account.

“Unbeknownst to participants, defendants had deliberately designed the RAFV tool to favor two of TIAA’s most profitable investment products: the TIAA Traditional Annuity and the TIAA Real Estate Account,” the complaint alleges. “Regardless of the participant’s individual circumstances, the RAFV tool was coded to recommend an allocation to the TIAA Traditional Annuity in six out of seven recommended models. The RAFV tool was similarly designed to recommend an 8% or 9% allocation to the TIAA Real Estate Account for every participant.”

Law firm Schlichter Bogard is representing the plaintiffs in Kelly et al. v. Teachers Insurance and Annuity Association of America et al., seeking class action status for violations in both ERISA-covered and non-ERISA covered retirement plans.

TIAA denied the charges in an emailed comment, and Morningstar declined to comment on the pending litigation.

The lawsuit also cast the specific practices as part of a broader, decades-long strategy by TIAA to generate revenue to combat fee compression for its 403(b) retirement plan services. The complaint calls the alleged practices an “ongoing unlawful scheme to enhance corporate profits,” stemming from an alleged goal of TIAA in 2013 to bolster flows to its TIAA Traditional Annuity.

“A critical component of the scheme was for TIAA to leverage its position as a recordkeeper to employer-sponsored plans, in order to gain access to participants and make investment recommendations that favored its own products,” the plaintiffs allege.

TIAA has managed through Securities and Exchange Commission charges in the recent past, settling similar complaints filed by the regulator for allegedly steering participants to roll assets into TIAA products in 2021 for $97 million. In February, it settled charges of violating the SEC’s Regulation Best Interest for individual retirement account recommendations for $2.2 million. In both cases, the firm neither admitted nor denied the charges.

Defense Forthcoming

TIAA responded to the lawsuit in an emailed statement, calling it “without merit” and noting that “TIAA will defend itself vigorously.”

The firm argued that the retirement adviser tool and the related investment advice and selection of asset classes are developed by Morningstar’s third-party investment management services and selected by the plan fiduciaries.

“The tool’s asset allocation recommendations use the asset classes and investments available within the participant’s employer-sponsored retirement plan, which are selected by the plan sponsor or a third-party consultant selected by the sponsor,” the firm wrote. “TIAA representatives are required to adhere to the tool’s recommendation and are trained on this.”

The firm also wrote that it follows regulatory compliance and disclosure rules around fees and conflicts of interest.

“TIAA believes in the importance of advice in achieving better outcomes in retirement and we take great care to deliver advice that is in their best interest,” the statement said. “TIAA does not put its own interests ahead of our clients. Any claims to the contrary are false.”

Morningstar noted via email that it does not comment on pending litigation.

The plaintiffs allege that TIAA and Morningstar knew about the conflicts of interest issues in the retirement planning tool and concealed them, as evidenced by whistleblowers who voiced the concern to media outlets, leading to coverage that included an NBC News report published on August 2.

The lawsuit filed Monday claims that TIAA financial consultants were given a “quota for persuading a certain number of participants” to make allocations into the TIAA annuity and real estate account, with potential to quality for “certain year-end bonus awards.”

The suit further claims breach of fiduciary duties by TIAA and subadviser Morningstar for positioning the retirement planning tool as “independent and unbiased” and for not adequately disclosing the conflicts of interest or fees to be gained from recommendations.

The plaintiffs allege that participants in TIAA-recordkept plans were pitched two services. The first was allegedly an investment advice service, TIAA Retirement Advisor, which allowed participants to access the RAFV tool online, over the phone or in person with a financial consultant. The second was the managed account service called TIAA Retirement Plan Portfolio Manager that followed recommendations from the RAFV tool.

‘Hard-Coded’ Annuities

The four plaintiffs in the lawsuit filed Monday are: a participant in the Northeastern University Basic Retirement Plan, an ERISA-governed 403(b) defined contribution plan; a participant in ERISA 403(b) plans from Drexel University and Thomas Jefferson University; and a participant in a non-ERISA-covered 403(b) plan offered by the State University of New York at New Paltz; and a participant in two non-ERISA plans with the University of Michigan.

Each allegedly met with a TIAA financial consultant, who steered them into TIAA investments through the adviser program and tool.

The investment offerings allegedly “hard-coded” to the retirement tool include the TIAA Traditional Annuity, a fixed annuity contract that returns a minimum interest with a right to annuitize, and the TIAA Real Estate Account, a variable annuity with investments in commercial real estate, real estate investment trusts and fixed-income investments. The suit alleges that the real estate investment is TIAA’s “most expensive variable annuity product,” with an expense ratio of 87 basis points.

Beyond those two investments, the tool recommended from a portfolio of “multiple investment options, including non-proprietary products,” according to the lawsuit.

The plaintiffs allege there were other, better-priced options available for participants to invest in at the time of the recommendations.

The complaint paints a broader story of fee pressure on TIAA stemming from changes to 403(b) laws, along with shifting demographics, including a wave of Baby Boomer retirees, all of which caused the firm to turn to “unlawful” activities to make money.

“The scheme involved expanding TIAA’s individual advisory business and driving more assets directly into its most profitable proprietary investment products, including products outside retirement plans,” according to the lawsuit.

In addition to class-action status for the litigation, the plaintiffs are seeking remedies including return 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,” equitable relief from the allegedly “ill-gotten” profits including a “disgorgement or a constructive trust,” and for the defendants to halt the practices described in the lawsuit.