John H. Biggs
Executive-in-Residence and Adjunct Professor of Finance
New York University
Former Chairman, President and Chief Executive Officer, TIAA-CREF
TIAA-CREF Institute Fellow
February 2010 |
The typical 401(k) plan has fundamental flaws when evaluated as a vehicle for providing retirement income security. Even though both TIAA-CREF funded plans and typical 401(k) plans are based on defined contribution financing, there are profound differences between the two. Understanding these design differences will be valuable to policy makers looking to reform the 401(k) system and also to employers and 401(k) institutional providers in reshaping their plans. The emphasis in the design of plans funded with TIAA-CREF annuities has been to generate and provide an adequate and secure retirement income for plan participants. Because of its basic design features, plans funded with TIAA-CREF annuities can be analogized to a pension plan in that it provides lifetime income at retirement rather than as a tax-favored wealth accumulation vehicle for employees to defer current income as a personal supplement to retirement income.
TIAA-CREF funded plans focus less emphasis on the dollar accumulation at retirement, per se, but rather focus is on the future annual income generated by plan accumulations. In addition, TIAA-CREF participants have access to unique account options that provide value to both individuals saving for retirement and retirees needing income from their plan. The components of the “endowment model” of investing have been incorporated in the TIAA-CREF investment menu, and all were created for financing retirement, not for general investment purposes of traditional investors. With its design focused on generating retirement income, the ability to annuitize assets in retirement is an inherent feature in plans funded with TIAA-CREF annuities and the entire focus as a participant approaches retirement is on lifetime annual income.