Corrected: This article incorrectly reported that the annuity portion of the Teachers Insurance and Annuity Association-College Retirement Equities Fund became taxable in 1986. The insurance portion of TIAA-CREF became taxable that year.
TIAA-CREF, a $200 billion pension fund for employees in higher education, private schools, and nonprofit education and research institutions, hopes to expand into the huge market of state-run pension plans for teachers.
The company’s decision follows its loss of tax-exempt status under the federal tax law enacted this summer. The tax exemption had prevented the fund from offering retirement plans to elementary and secondary teachers, except those at private schools.
Now, the nation’s 3 million public school teachers are legitimate customers.
“We are considering opportunities formerly precluded by our tax exemption,” said Tom Pinto, a spokesman for the New York City-based company. “Among these is the public K-12 market.’'
Impact Downplayed
The Teachers Insurance and Annuity Association-College Retirement Equities Fund was created in 1918 as a nonprofit, tax-exempt pension-fund system. In 1986, the annuity portion of its business became taxable. This summer, the company lost a congressional fight to keep its retirement business tax-exempt. Competitors said the exemption status gave TIAA-CREF an unfair advantage.
The company said it is trying to soften the blow for the fund’s 1.9 million participants. The Wall Street Journal reported that the change could cost the pension fund as much as $1.2 billion over the next several years.
But Mr. Pinto said the company was studying what the loss would be and would not confirm that figure. “We fully expect our dividend rates to remain among the highest in the industry,” he said.
The organization does not expect the new taxes to affect individuals who have invested in CREF, a company that offers participants a variable annuity with a range of investment options.
Participants in TIAA, an insurance company that offers a traditional annuity with a guaranteed minimum return plus dividends, will be affected.
The public K-12 sector is a natural market for the pension fund. Most public school teachers are now served by state-run benefit plans, whose funds are invested by state officials and the investment firms they hire. Some of those plans face troubling deficits.
In contrast, under optional or defined-contribution retirement plans, individuals have some say over how their money is invested.
Forty-six states have passed laws offering optional retirement plans to state employees, and TIAA-CREF is an optional-retirement-plan provider in 43 of them. “It is our understanding that, in most cases, state legislation would be required in order for an optional retirement plan or a defined-contribution plan to be offered to public K-12 employees,” Mr. Pinto said. “However, each state is different and, in some instances, cities or even local districts may be able to offer a defined-contribution plan without the passage of legislation.”
