Fixed Income for Retirement Saving: TIAA Traditional’s Lessons on Quality, Duration, Risk, and Gradual Withdrawals

Abstract

TIAA’s Traditional annuity has supported retirements for a century. It resembles a stable-value fund. The author investigates the holdings supporting it, constructs readily available alternatives resembling those holdings, compares the returns of those alternatives with Traditional, and constructs a new measure of risk to compare Traditional’s risk with that of its alternatives in a more appropriate way than by using short-term standard deviation of returns. Under this new measure of risk, which is appropriate for retirement investors, some alternatives exhibited second-degree stochastic dominance over Traditional using 1987–2015 data. However, Traditional may still be a better choice for unsophisticated investors.

TOPICS: Retirement, portfolio construction, legal/regulatory/public policy

Key Findings

• • TIAA has reported Traditional Annuity’s returns in nonstandard, sometimes incorrect ways. Its short-term volatility is irrelevant because withdrawals require 9 years.

• • The duration and quality of TIAA’s General Account can be matched by mutual funds for which feasible historical payouts over 9 years can be inferred.

• • Over 1987–2015, Traditional’s 9-year payouts were second-degree stochastically dominated, reversing results using shorter-term volatility measures.