TIAA’s Target Date Funds Are Built on a Risk Illusion

/ ChrisTobe

TIAA and its academic partners want you to believe they have discovered a free lunch in retirement investing: add a fixed annuity to a target date fund, and you magically get higher returns and lower risk.

That claim is now being aggressively promoted through a new TIAA Institute / Charles River Associates (CRA) paper, The Impact of TIAA Traditional in Target Date Glidepaths. The paper concludes that target date funds (TDFs) including TIAA Traditional “outperform” conventional TDFs across virtually every scenario—especially because the annuity appears to reduce volatility while maintaining bond-like returns.

There’s just one problem.

The “low risk” that drives these results isn’t real, and the analysis completely ignores the upcoming legal issue: fixed annuities issued by TIAA are prohibited transactions under ERISA when mixed into 401(k) target date funds.

This is not an academic quibble. It is the same kind of modeling sleight-of-hand that courts have rejected in employer stock cases, stable value cases, and valuation fraud cases for decades.

The Core Trick: Fake Volatility

TIAA’s modeling rests on a simple but profoundly misleading assumption: that TIAA Traditional has lower volatility than bonds.

Why does it appear that way?

Because annuities are not marked to market.

TIAA Traditional’s returns are not set by market prices. They are set by internal crediting decisions, made at TIAA’s discretion, based on assets held in TIAA’s opaque general account. Losses are smoothed. Gains are withheld. Risk is buried on the insurer’s balance sheet.

That doesn’t make risk disappear—it just hides it.

Calling this “lower volatility” is like calling a non-traded REIT safer than public real estate because the price doesn’t move. Courts don’t buy that logic, and fiduciaries shouldn’t either.

Bonds and Annuities Are Not the Same — TIAA Admits This (Then Ignores It)

In a quiet but telling footnote, the TIAA Institute paper admits:

“Per the Investment Company Act of 1940, an annuity cannot be part of a mutual fund.”

That should have been the end of the analysis.

Instead, TIAA proceeds to do exactly what the law forbids in substance if not in form: it embeds an insurance contract inside collective investment trusts and managed accounts and then models it as if it were a bond fund.

But annuities are not bonds:

  • They are illiquid
  • They cannot be freely sold
  • They often cannot be exited without delay or penalty
  • Annuitization is frequently irrevocable
  • There are no downgrade or termination rights
  • Participants bear insurer credit risk, not market risk

Diversification theory assumes liquidity. Once liquidity is gone, correlation statistics are meaningless. You are not “rebalancing” risk—you are locking it in.

The Prohibited Transaction Elephant in the Room

Most strikingly, the TIAA Institute analysis never mentions ERISA §406 prohibited transactions. Not once.

That omission is not accidental. It is essential to the conclusion.

Here is the reality TIAA’s modeling ignores:

  • TIAA is the recordkeeper
  • TIAA is the annuity issuer
  • TIAA sets the crediting rates
  • TIAA retains the spread
  • TIAA is therefore a party in interest multiple times over

Under ERISA, when a fiduciary causes a plan to transact with itself—or retain a product that generates undisclosed compensation—that transaction is presumptively illegal, regardless of performance.

And make no mistake: TIAA Traditional generates compensation.

“No Fees” Is a Myth — The Spread Is the Fee

TIAA repeatedly claims that Traditional has “no fees.” That is simply false.

The compensation is taken as spread—the difference between what TIAA earns in its general account and what it credits to participants. Independent reporting, including NBC News, has reported that the hidden spread is around 150 basis points annually.

Importantly, this spread figure was not disputed by TIAA when given the chance by NBC.

Spread is compensation. Undisclosed compensation retained by a fiduciary is the textbook definition of ERISA §406(b)(1) self-dealing.

No amount of glidepath modeling can legalize that.

Performance Does Not Cure a Prohibited Transaction

This is where TIAA’s entire argument collapses.

After the Supreme Court’s decision in Cunningham v. Cornell, plaintiffs do not need to plead around exemptions. Defendants must prove them.

That means:

  • You do not get to justify self-dealing because a model looks good
  • You do not get to ignore conflicts because returns are “competitive”
  • You do not get to replace law with regression analysis

If a transaction is prohibited, the remedy is disgorgement, not benchmarking.

Why This Matters for Courts, Fiduciaries, and Plaintiffs

Target date funds are now the default investment for tens of millions of workers. Embedding insurance contracts inside them—without liquidity, transparency, or ERISA-compliant compensation structures—creates a perfect storm:

  • Participants cannot exit
  • Fiduciaries cannot monitor properly
  • Conflicts are structural, not incidental
  • Losses may not show up until it’s too late

We have already seen courts reject “prudent process theater” in other contexts. The same reckoning is coming here.

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Bottom Line

TIAA’s target date modeling works only if you accept three false premises:

  1. That hidden risk is no risk
  2. That illiquid insurance contracts are bonds
  3. That ERISA’s prohibited transaction rules don’t apply

None of those premises survives serious scrutiny.

Once annuities are properly treated as what they are—ongoing transactions with a party in interest that generate undisclosed compensation—the supposed diversification and risk reduction disappear.

What’s left is a glidepath built on a legal and economic illusion.

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