Teachers expands its curriculum - interview with TIAA-CREF - CSIV

Chief Executive, The, Nov, 1998 by Jennifer Pellet

Size doesn't matter? Don't you believe it. With $223 billion in assets under management, TIAA-CREF is the largest portable pension system in the world - which gives it plenty of market clout. So when The Teachers calls on you to discuss corporate governance, you might want to pay attention.

For a vulture, John Biggs is a pretty nice guy, says John Bogle, chairman and chief executive of Vanguard Fund.

A backhanded compliment? Well, not quite. "I was speaking at the American Life Insurance Council about the future of financial services," recounts Bogle. "I told the insurance company presidents, 'You will have to get costs down because there are a lot of vultures around who will take this business away from you.' Then I spotted John, so I pointed and said, 'One of them is right there.' But I meant it as a high compliment.' My next sentence was, 'And Vanguard is another.'"

Viewed a scant decade ago as a stodgy dowager whose main virtue was ranking as the world's largest private pension fund, Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF) has since straggled to overcome a legacy of lethargy. The company originally founded in 1918 by Andrew Carnegie to provide retirement security for educators gradually evolved into a huge pension system with two arms: TIAA, an insurance company for people employed in higher education and research, and CREF, a pension system offering eight variable annuity accounts, including the CREF stock account - the largest single-managed equity fund in the world.

Today, TIAA-CREF continues to be a mega-player in the institutional investor game, its $223 billion arsenal of assets under management outgunning the holdings of the second and third biggest U.S. pension management entities, the California Public Employees' Retirement System (CalPERS), which has $127 billion in assets, and the New York State Common Retirement Fund, with assets of $96 billion. But a lot of other things have changed for the company commonly known as "The Teachers."

As the only defined contribution plan on most campuses, TIAA-CREF enjoyed a virtual monopoly for the bulk of its lifespan. Only when some universities began to allow in competitors like Fidelity, Vanguard, and Scudder during the late '80s did The Teachers offer participants greater flexibility and a wider range of investment options, including a stock index fund, growth stocks, bonds, global equities, and a money-market fund.

TIAA-CREF's next wake-up call came last year, when the Taxpayer Relief Act removed the company's 80-year tax exemption, a radical shift in status that affected every investment in the company's then-$91 billion TIAA portfolio. The move was a mixed blessing for The Teachers, bringing with it the challenge of paying the new tax without decreasing participants' annuity payments, but also freeing the company to explore new market segments.

"We couldn't even offer IRAs to our participants when we were tax exempt," explains Biggs, who began his career in actuarial management at General America Life Insurance Co. in 1958. Having subsequently served as president and CEO of Centerre Trust Co. and vice chancellor for administration and finance at Washington University, Biggs had experience in both insurance and education by the time he joined TIAA-CREF as president and COO in 1989. The 62-year-old has been shepherding TIAA-CREF through transition as its chairman and CEO since 1993, and is quick to reaffirm the company's commitment to shunning high-risk investments. "We should never have a product that can blow up a customer," he asserts. "That's okay for Fidelity to do; they have a different customer base and relationship."

The Teachers has won high marks for the performance [TABULAR DATA OMITTED] and low-fee structure of the series of new offerings spawned by its change in tax status, which include a retail real estate fund and a family of six mutual funds (see table, above). Like the company's CREF stock account, which minimizes risk by investing in a broad range of stocks, the open-end mutual funds are long-term oriented, trim costs by limiting trading, and avoid high-risk actions.

"I probably have more respect for TIAA-CREF than for any other firm in this business," says Bogle, who notes that communicating its new funds to the retail marketplace may be the company's biggest challenge. "It may take a few years, but there's no doubt in my mind that they will become a major factor in the mutual fund industry. They have a sensible investment strategy - index-oriented, playing down the middle, and running at a very low cost. They will be tough competition for us."

Bogle speaks of his fellow vulture with equal enthusiasm. "I like the cut of his jib," he says. "John Biggs is a solid citizen. He's a gentleman. He's got a good mind, and a tremendous sense of personal integrity."

Unlike CalPERS' in-your-face approach to dictating appropriate governance principles, The Teachers takes a kinder, gentler stance. "Our idea is that we can probably do more good by going out to see as many of our portfolio companies as we can," says Biggs.