Compliance February 16, 2024

TIAA Subsidiary Settles With SEC for $2.2M on IRA Recommendation Charge

TIAA-CREF Individual and Institutional Services settled charges of failing to comply with Regulation Best Interest.

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The Securities and Exchange Commission on Friday announced that registered broker/dealer TIAA-CREF Individual & Institutional Services LLC, a TIAA subsidiary, will pay more than $2.2 million to settle charges it allowed customers to invest in IRA offerings without notifying them of lower-cost options.

The SEC charged TC Services under Regulation Best Interest, arguing that advisers failed to comply with the regulation intended to ensure customers are receiving the best guidance possible on their investments. According to the regulator, the TIAA subsidiary did not steer retail customers to the lowest-cost, comparable investment options in its TIAA individual retirement account.

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The IRA allowed customers to invest in a “core menu” of affiliated investments, including affiliated mutual funds, as well as through an optional “brokerage window” with a broader array of securities, including a variety of mutual funds, ETFs, stocks and bonds, according to the regulator. The brokerage window, at that time, had the lowest-cost share classes of certain mutual funds on offer, but with the investment minimums waived—something the advisers allegedly did not properly point out to clients, according to the charge.

“Due to the waivers, customers could have purchased substantially equivalent, lower-cost share classes of these mutual funds in the brokerage window,” the SEC wrote. “The SEC’s order finds that TC Services violated Reg BI by, among other things, failing to disclose both that substantially equivalent, lower-cost share classes of affiliated funds were available in the brokerage window and the conflicts that created.”

According to order, more than 94% of TIAA IRA customers invested only through the core menu; that led to nearly 6,000 customers paying more than $900,000 combined in expenses that “they could have avoided.”

TC Services did not admit or deny the findings, according to the SEC. The firm consented to a cease-and-desist order from violating Reg BI and to payments of $936,714, together with prejudgment interest of $103,424.91 and a civil monetary penalty of $1.25 million.

“We are pleased to settle this matter and have enhanced our processes and procedures to address the SEC’s concerns,” a TIAA spokesperson said.

In making its determination, the SEC “considered TC Services’ prompt remedial efforts, that TC Services disclosed the issue to Commission staff who were in the process of examining” the services, the regulator wrote in the settlement order.

“Reg BI protects retail investors by requiring broker/dealers to act in the best interest of their customers when making recommendations, and today’s action demonstrates our commitment to ensuring compliance,” said Thomas P. Smith Jr., associate regional director in the SEC’s New York regional office, in a statement.

The Department of Labor’s Employee Benefits Security Administration is currently considering public commentary on a proposed retirement security rule, often called the fiduciary proposal, that would expand fiduciary duties for financial advisers in areas including rollovers from retirement plans.

Opponents have noted that the SEC’s Reg BI already protects savers by looking after their best interests. Proponents of the new rule say the protections do not go far enough, in part because advisers are not operating under Employee Retirement Security Act standards designed to protect retirement plan participants.

Client Service February 16, 2024

Empower Reports Year-Over-Year Growth in Workplace, Wealth

CEO Ed Murphy says the firm is on the lookout for wealth-related acquisitions and notes 500 employees were hired into the division in 2023.

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Empower saw growth in both its workplace solutions and restructured wealth and asset management divisions in 2023, according to an earnings presentation by its parent firm, Great-West Lifeco Inc., on Thursday.

The recordkeeper and wealth manager reported defined contribution assets under administration grew 17% year-over-year in 2023 to $1.5 trillion.

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“We’re continuing to see strong organic growth in 2023,” says Ed Murphy, Empower’s president and CEO, speaking after the investor call. “We’re also continuing to see a strong partnership with the adviser community. We see that on the workplace side with the number of [requests for proposal] and the new wins that we have, many of which are adviser-driven.”

Empower reported funded sales of $54 billion in its workplace solutions business in 2023, with pipeline sales of almost $2 trillion.

In its consumer wealth division, the firm reported assets under administration and management grew 31% year-over-year to $72 billion; that division, Empower Personal Wealth, was created last year under new head Carol Waddell to further connect workplace and consumer wealth management. The division grew out of Empower’s 2020 acquisition of Personal Capital and is still in “the first or second inning” of development, according to Murphy.

“We’ve done a really good job of standing up that business and investing in the brand and investing in technology and investing in people,” he says.

Murphy notes that the firm added more than 500 employees in 2023 for a total of more than 2,000 employees overall, including more than 1,000 advisers. He sees potential to add more talent to the division even as other wealth management firms are announcing layoffs, saying roles for which they will hire should range from financial advisers to engineers and product developers for consumer-facing products.

“A lot of the talent is coming to us through word of mouth and through employee referrals,” Murphy says. “We have found that to be a great channel for us in terms of new hires.”

M&A Potential

Empower’s head also said the firm is now an active acquirer in wealth management should opportunities arise, whether for distribution or product solution add-ons.

“If there’s a capability that we’re lacking and it makes sense for us to acquire versus build or partner, we’ll certainly do that,” Murphy says. “At this point, from a distribution standpoint, we’re growing organically in that regard. …. It’s also possible that at some point down the line, it makes sense for us to acquire distribution or even to partner in a particular area where we don’t have a meaningful presence in the marketplace.”

The CEO emphasized that, currently, the firm continues to be focused on inward development in terms of technology and building out the team.

When asked about conflicts with retirement plan advisories that also offer wealth management, Murphy says Empower, first, takes direction from its plan sponsor clients in terms of where to refer potential clients.

Second, when the “switch is turned on” and referrals are going to Empower, he notes that representatives first make sure that a participant would “benefit from rolling out of the plan” as opposed to staying in and maintaining institutional pricing. Representatives will also ask, he says, if a participant has a financial adviser already with whom they should partner.

Finally, Murphy notes, a little more than a year ago, the firm set up an adviser referral desk to triage participants depending on their need. Often, he says, other financial advisers do not offer services to investors with less than a certain dollar amount, in which case they may be good clients for Empower Personal Wealth.

“Around dollar amount, we are agnostic,” Murphy says. “We think people that have $30,000 in discretionary income, they want help too, and we believe we can help them in a way that addresses their needs. … But obviously, some advisers need to [have asset thresholds] because they just don’t have the bandwidth or capacity to support hundreds of lower-balance relationships. We’re in a better position to do that.”

Prudential Integration

The firm noted in its presentation that the integration of Prudential Financial Inc.’s retirement business is on track to be completed by the end of 2024, announcing that participant, asset and revenue retention are “ahead of expectations.”

In addition, the sale of the firm’s Putnam Investments division to Franklin Templeton on January 1 has resulted in “a modest gain upon disposal” to be recorded in the year’s first quarter.

In looking at the past four years from 2020 through 2023, Empower reported AUA growth of roughly two times from 2020 to the end of 2023, to $1.5 trillion from $726 billion. Total retirement plan participants grew at a similar rate, rising to 18.5 million participants in 2023 from 9.4 million in 2020, due in part to acquisitions.

Great-West Lifeco is based in Winnipeg, Manitoba, and operates in insurance, recordkeeping and wealth management in Canada, Europe and the U.S.

“We are very excited about our prospects in the U.S. retirement and wealth market,” Great-West LifeCo President and CEO Paul Mahon said on the call.

Fidelity Investments, the largest recordkeeper in the U.S. that also operates in personal wealth services, reported last week workplace retirement plan accounts rose 6% to 43.2 million in 2023, and retail accounts grew 3% to 38.7 million.

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