TIAA-CREF Eyes 12b-1s, Higher, Correct' 529 Fees
July 18, 2005
TIAA-CREF has taken a significant step that is symbolic for a firm with a long-standing reputation for high governance standards and that will affect the bottom line for many of its retail mutual fund investors.
The traditionally low-cost firm is proposing changes that would dramatically raise fees on its actively managed retail funds, according to MarketWatch.
"This action is being taken to align what the actual costs are related to these funds," said Stephanie Cohen Glass, a spokeswoman for the company. "We will remain a low-cost provider, and [costs] are relatively low in comparison to the industry even if this new fee structure is adopted."
The changes primarily affect investors in TIAA-CREF 529 plans. Apparently, the funds have been losing money since they were started in 1999, and the bloodletting has only gotten worse with the recent compliance and regulatory squeeze.
From 30 BPS to 85
In the example of the TIAA-CREF Institutional Small-Cap Equity Fund, retail clients would pay a new 12b-1 fee, intended to recoup marketing costs, with total fees, including waivers, running 85 basis points, up from 30 basis points.
The 12b-1 fees would not kick in until at least April 2007, but are another indication of how TIAA-CREF is undergoing a metamorphosis to enter the mainstream financial services market. Furthermore, the addition of the fee bucks a trend in the industry to drop the fees, which have come under regulatory scrutiny (see related story on AIM lowering its 12b-1 fees, page one).
The fee hikes are also likely to affect TIAA-CREF's foothold in the 529 plan business. The company, which used to be the clear dominant player in the field, began losing ground as its contract for the New York State plan gave way to low-cost competitor Vanguard Group. However, typically small account values in 529 plans make for high administrative expenses and slim margins, so it is likely that the company's decision to back away from that market is intentional.
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