AG James: Firm that touted 'underperfoming' investments will pay restitution

Thousands of clients of a century-old financial services firm will receive $97 million in restitution after they were "fraudulently misled" into switching retirement investments to higher cost, but often underperforming products, the New York State attorney general said Tuesday.

Doing business as TIAA-CREF Individual & Institutional Services Inc., the subsidiary of the Teachers Insurance and Annuity Association of America reaped hundreds of million dollars in profits over six years, from 2012 to March 2018, as its sales force, which failed to disclose conflicts of interest, was "essentially selling fear," Attorney General Letitia James said in a statement announcing the restitution.

"For years, TIAA put profits over people, taking money from people’s hard-earned retirement funds," James said.

The restitution will go to about 20,500 investors nationwide who opened Portfolio Advisor accounts with assets from TIAA-administered retirement plans from January 2012 through March 2018. Most investors will receive between $1,000 and $10,000 as a partial return in management fees paid on the more expensive accounts, plus interest, the settlement states.

In a statement, a TIAA spokesperson said the company cooperated with regulators and had begun implementing business practice changes even before the AG's investigation.

"We regret the times that we did not live up to our clients’ expectations of us," the statement said. "We have learned some valuable lessons and have applied those lessons to enhancing our training, supervisory controls and disclosures."

The firm, which James said now is undertaking reforms to prevent the same flawed practices from recurring, had earned its clients' trust by providing investments and financial services over decades to employees in academics, governments, medicine, cultural and other nonprofit fields. But when its institutional business encountered difficulties in 2011, the company strayed from serving its investors, James said.

Instead, it developed "a fraudulent and misleading marketing pitch to convince its clients to roll over assets from low-cost, employer-sponsored retirement plans to higher-cost, individually managed accounts in TIAA’s Portfolio adviser program," she said, despite the firm learning in 2018 that the employer plans could have a higher rate of return.

Sales representatives, the attorney general said, persuaded clients to move their funds from plans their employers sponsored — whose benefits they downplayed or omitted — by presenting "a biased and misleading comparison" of their options and marketing managed accounts as the sole option to self-directed investments, James said.

By 2018, TIAA realized the managed accounts were likely to underperform compared with the employers' sponsored plans that were "regularly rebalanced" — meaning their assets were adjusted based on free advice from third parties, she said.

Later research, "conducted pursuant to the Office of the Attorney General's investigation," James said, revealed a sample employer plan regularly reinvested by following that free advice "had superior risk-adjusted returns."

Instead of acting as objective advisers who did not earn commissions, the sales force was "heavily incentivized" through compensation and subjected to what James called supervisory and disciplinary pressures to find what she called their clients' "pain points."

While clients were told their advisers were following strict fiduciary standards that obliged them put their investors first, the firm instead only held its employees to "a less rigorous suitability" standard," she said.

Starting in 2017, the firm had begun reviewing and fixing some — but not all — of its practices.

Now, in resolving claims made by both the attorney general and the Securities and Exchange Commission, the firm has agreed to apply the fiduciary standard to all recommendations about fund rollovers, abolish different compensation for selling managed accounts, end or fully disclose conflicts of interest, plainly say when its representatives are not acting as fiduciaries and train its advisers to fairly compare managed accounts with employer-sponsored plans, James said.

She added: "New Yorkers can always trust my office to go after corporate greed."

With Robert Brodsky