WASHINGTON - TIAA-CREF, the nation's largest defined contribution service provider, would lose its tax-exempt status under the House Ways and Means Committee's tax bill.
The Teachers Insurance and Annuity Association - College Retirement Equities Fund, New York, had $195 billion under management as of June 1.
If TIAA-CREF had been taxed last year, its bill would have been $150 million to $350 million, said Mike Fagan, vice president.
TIAA-CREF officials believe only TIAA, the insurance portion of the institution, would be taxed as a "stock life insurance company." They consider CREF to be an investment adviser. TIAA manages $86 billion of the company's total assets.
Should TIAA-CREF lose its tax-exempt status, fees to participants might increase slightly and benefits might decrease, company officials said.
House Ways and Means Committee Chairman Bill Archer (R-Texas) targeted TIAA-CREF and Mutual of America Life Insurance Co., New York, in his $85 billion tax relief proposal.
The proposal - of which TIAA-CREF executives had no advance warning - repeals the grandfathering rules in the 1986 Tax Act that exempted the pension businesses of TIAA-CREF and Mutual of America from taxation.
Mutual of America manages about $9 billion, $7.5 billion of which is for tax-exempt institutions.
Taxing TIAA-CREF and Mutual of America would provide some of the revenue the government would lose under Mr. Archer's tax relief plan - $1.5 billion over 10 years.
The Senate's budget reconciliation bill contains a similar provision, but it only applies to Mutual of America.
Most Washington observers believe TIAA-CREF will remain tax-exempt.
"It's hard to bet against them when they've managed to protect their tax status for 80 years," one lobbyist said.
They're not as sure about Mutual of America, since it's named in both the House and Senate versions. Interestingly, TIAA-CREF was instrumental in setting up Mutual of America in 1945, when it was known as the National Health and Welfare Retirement Association, serving the social welfare and health care communities.
Fate rests with conference panel
The fate of the two proposals will be decided by a House/Senate conference committee.
Observers say whether the provision survives depends on how much Mr. Archer wants to make his point about corporate welfare reform.
One Washington lobbyist said New York Sens. Alfonse D'Amato and Daniel Patrick Moynihan, both members of the Senate Finance Committee, could show TIAA-CREF executives they kept the issue out of the initial version of the tax bill, yet leave the door open to include it later.
"I think it's going to be added back into the conference version because it makes so much sense. I think if Congress is going to hit one of these insurers, they'll go for both," said the lobbyist.
The New York senators were instrumental in 1986 in fending off the last attack on TIAA-CREF's tax-exempt status.
The full House and Senate probably will vote on the bill before their July 4 recess. Then, the joint conference committee gets the bill.
James Wilcox, Mr. Archer's press secretary, said the tax exemption is "basically a carve-out for one group . . ."
"If all the other service providers are able to manage funds at reasonable prices without a tax exemption, TIAA-CREF and Mutual of America should be able to, as well.
"This measure will level the playing field."
Hit with 'bolt of lightning'
TIAA-CREF executives were stunned when they learned June 9 their tax-exempt status was at risk and that a House committee was debating the proposal that night.
It was "like a bolt of lightning out of the blue," Mr. Fagan said.
With no time to lobby the House committee members, TIAA-CREF instead rushed staff - including Chairman John H. Biggs - to Washington to talk to members of the Senate Finance Committee to make sure the Senate version of the bill didn't include a similar provision.
Mr. Biggs also wrote to more than 200 university and college presidents, asking for lobbying support.
Thomas J. Moran, president and chief executive officer of Mutual of America, would not say whether Mutual of America was lobbying Washington legislators about the proposals to revoke its tax-exempt status.
If his company loses its tax-favored treatment, Mr. Moran said, he hopes there will be "some transition period over time, so we have time to put into place the structures we will need to operate as a taxable entity. We don't want to see a sudden reaction."
Meanwhile, Mr. Fagan said if TIAA-CREF loses its status, he can't imagine participant fees will rise that much.
Instead, he expects the company will reduce the amount of profits going into reserve funds backing up annuity policies. TIAA-CREF's reserves already are about twice as large as required by New York state law, Mr. Fagan said.
He said the average inclusive cost for a participant account, which mixes an annuity from TIAA and mutual funds from CREF, is about 35 basis points and is never higher than 40 basis points.
Consultants said fees would increase 20 or 30 basis points in order to cope with taxes.
"I presume it will hamper their competitiveness and they will not be able to avoid some price rise," said Ron Bush, a consultant at Access Research.
TIAA-CREF does pay taxes - about $13 million last year - on its non-pension business, Mr. Fagan noted.
Competitors support the change
Because other American insurance and mutual fund companies' pension services are not tax-exempt, executives at competing firms long have hoped TIAA-CREF would lose its tax-favored status.
They say the company has an unfair competitive advantage in retaining the huge, roughly 50%, market share it has in the 403(b) retirement plan market.
Stephen D. Bickel, chairman and chief executive officer at VALIC, Dallas, said: "We think it is a correction that is long overdue. All of TIAA-CREF's competitors are paying taxes .*.*. and we still provide very attractive products for higher education personnel. We're confident that TIAA-CREF would be able to do the same."
VALIC is one of TIAA-CREF's strongest competitors with $20 billion under management for 403(b) plans.
Camille Lepre, a spokeswoman for Fidelity Investments, Boston, said: "The dynamics in the 403(b) market are that most players are for-profit companies. TIAA-CREF is an anomaly. Competition in this market is not based on companies being for- or not-for-profit. We compete on the basis of the products and services we offer."
Fidelity is the largest mutual fund player in the 403(b) market with nearly $23 billion at June 1.
"In a nutshell, I think taxation will have the effect of leveling the playing field for other vendors. The 403(b) market is being heavily investigated by mutual fund vendors, and TIAA-CREF has been able to keep them at bay, a bit, because their prices are so low," said Karina Istvan, a consultant at Cerulli Associates Inc., Boston.
" . . . If the legislative proposal goes through, the for-profits are going to give a big cheer."