TIAA's Fees Are Incredibly High

GuruFocus.com

- By Holmes Osborne, CFA

I was quite surprised to see how high the fees are at TIAA. As you may know, the large money manager is very prevalent at universities throughout the U.S. Having such a strong reputation, I assumed the fees would be closer to Vanguard. They are not even close.

TIAA-CREF started off in 1910 as the Teachers and Insurance and Annuity Association of America. The College Retirement Equities Fund was founded in 1952. The company dropped CREF from its name in 2016. TIAA serves 5 million participants, has $1 trillion in assets and is the provider at 15,000 institutions.


I'll start off with what I think is the most egregious fees--money market funds. TIAA's money market fund charges 0.48%. That's more than some equity mutual funds! By contrast, Vanguard's Federal Money Market Fund charges only 0.11%. That's a big difference! Remember, interest rates are extremely low.

The next investment we'll look at is the Emerging Markets Equity Fund. The fee is 1.27%. It holds many familiar names--Alibaba (BABA), Tencent (HKSE:00700), Naspers (NPN) and others. Vanguard's Emerging Markets Stock Index charges only 0.14%. That is over one whole percentage point in fees!

The next fund is the Conservative Lifestyle Fund. These types of funds are good for participants who want to put a large percentage of their investments that match the style that they are looking for. Often times, these folks don't want to put too much time into making financial market choices. The net expenses of this fund are 0.73%. Mind you, this fund invests in bonds--many yielding 3% or less. We will compare this to the Vanguard Lifestrategy Income Fund. Vanguard's fees are 0.11%. Again, that is a huge difference, especially with bond yields close to all time lows.

Vanguard's Primecap is a highly respected equity fund that has been around a long time. The fund has averaged 10.45% a year in returns for 18 years. Its fees are 0.31%. Primecap's fees are lower than TIAA's money market, which charges 0.48%. Unbelievable.

The TIAA Index Fund charges 0.33%. Yikes! Vanguard S&P 500 Fund charges only 0.04%. Some funds are literally next to nothing, but not TIAA. TIAA is still living in the 1990s.

It's surprising how high TIAA's fees are. Since it's a nonprofit, why doesn't it charge much less? Vanguard is a nonprofit and has a low-fee model. My guess is TIAA has become a bit of a bureaucracy. They have financial advisers who call upon participants. Do those advisers make an income? You bet.

TIAA should go to a low-fee model like Vanguard has. There is no reason professors and participants should pay exorbitant fees. My firm charges less on a lot of balanced accounts than TIAA does on its money market--and we're retail with individual stocks and bonds!

I doubt if the average participant realizes this. They probably hear TIAA has a great reputation and leave it at that. If you know of any participants, please send them this article.

Disclosure: We do not own shares.

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This article first appeared on GuruFocus.