Look again. That stodgy professors’ pension fund has become one of the biggest and fastest-growing financial-services companies around. Operating from two unremarkable buildings on Manhattan’s East Side, the 1.6-million-member organization has undergone a dramatic six-year transformation that has doubled its assets to an eye-popping $113 billion and made it Wall Street’s 2,000-pound gorilla. But as chairman Clifton Wharton Jr. departs to become Bill Clinton’s deputy secretary of state, deep-pocket competitors are gunning for a business that was once its alone, leaving a tough challenge: how can TIAA-CREF compete with today’s financial innovators without abandoning its basic mission as a plain-vanilla pension fund for teachers?
Set up in 1918 by the Carnegie Foundation, TIAA-CREF is a financial institution unlike any other. It is the world’s largest private retirement plan. Its fixed-rate arm, Teachers Insurance and Annuity Association, is America’s third biggest life insurer, outranking such giants as Equitable and John Hancock. Its College Retirement Equities Fund, more than twice the size of Fidelity’s Magellan Fund, owns about 1 percent of all U.S. corporate stock. Both take retirement money from colleges and nonprofit organizations and use it for things like the $625 million mortgage on Minnesota’s Mall of America; $30 million worth of Huntsville, Ala., solid-waste-disposal bonds; and 1.3 million shares of Indonesian cement maker Semen Gresik. They don’t do business with the public.
When Wharton arrived six years ago after running the sprawling State University of New York, he found the organization’s constituents in open revolt. Mutual funds and insurers were launching new products daily, but academia had only two options, TIAA’s fixed-income annuities and CREF’s stocks. Professors got even angrier when they learned they couldn’t ride the great bull market of the 1980s: in order to focus on long-term investments without worrying about cash withdrawals, TIAA, unlike other insurers, barred its customers from withdrawing their money or moving it, even into CREF’s stock fund. Members were demanding a money-market fund, too, but CREF refused to start one. “There was a big school of thought that said, don’t let the faculty have choices, because they’ll make a bad choice,” recalls Northwestern University economist Marcus Alexis, now a TIAA trustee. And then there was that quaint practice of giving the staff Friday afternoons off in the summer. Competitors were touting round-the-clock service, but TIAA-CREF couldn’t get used to the idea that there were competitors.
Its trustees, most of them academics who heard the grumbling daily on campus, knew change was urgent; that’s why they broke with decades of tradition to hire an outsider as leader. Wharton moved more aggressively than even his most ardent supporters had expected. Within months he reorganized the company and announced the start of the long-stalled money-market fund. When colleges asked the Securities and Exchange Commission to block the new fund until TIAA-CREF let members transfer money out of TIAA, he quickly found a way to allow the transfers that TIAA had long deemed impossible.
Those swift steps defused years of hostility-and, by making it possible for other companies to lure customers from TIAA and CREF, opened the door to competition for the vast college-pension market. Mutual-fund companies and insurers plastered campuses with sales pitches urging disgruntled TIAA-CREF members to move their money. But TIAA-CREF has reacted with unexpected vigor, launching three new stock and bond funds and a nursing-home-insurance plan since 1990-no mean trick for a company that went from 1952 to 1988 without a single new product. So far, “they have not been hurt at all by the folks who thought they were going to feast on the retirement funds of the higher-education community,” contends benefits consultant Robert Wilson.
Unlike many corporate turnarounds, Wharton’s revolution at TIAA-CREF has been almost bloodless. “He is not a man who comes in and fires five levels beneath him,” says an admiring trustee. “He took the people who were there and reshaped them.” Wharton invites random groups of employees to lunch monthly and draws praise for innovative training efforts such as letting low-level staffers work for two months as his special assistants. “Most people want to do a good job,” he says. “The biggest mistake you can make is to assume all wisdom is concentrated at the apex.”
The task of Wharton’s successor, who may not be named for months, is a long-term one: while today’s tenured professors have long banked on TIAA-CREF, tomorrow’s faculty and staff are likely to be more familiar with the competition. “There’s no reason to think TIAA-CREF will maintain its dominant position,” says Fidelity marketer Steve Mitchell. Although others’ piece of the pie is small-Fidelity claims to be the retirement plan for just 4 percent of college and nonprofit employees-TIAA-CREF’s position on some campuses has eroded badly. Almost half the teachers and administrators at the University of Southern California have gone with Fidelity or Prudential. At Duke, only one fourth of the eligible employees are signed up with TIAA-CREF. “New people typically join Vanguard,” says the head of a research institute that lets employees choose either.
With nearly half of all college faculty expected to leave by 2005, TIAA-CREF’s share may begin to slide, and some of its strengths may become weaknesses. CREF outperforms most mutual funds, in part because its size keeps expenses low; if it matches the competition by offering a large number of funds with differing investment approaches, the advantages of size will be lost. TIAA earns a top return, despite big hits to its real-estate portfolio, precisely because its restrictions on transferring money-even now, members can withdraw funds only in installments over 10 years-allow it to buy properties and bonds that other insurers deem too risky or too hard to resell. If it makes withdrawals as easy as competitors do, it will have to invest as competitors do, and its edge on rates will vanish. Then, too, there’s no way for TIAA-CREF, which serves only a narrow slice of the work force, to match the competition’s massive image-building efforts. Convincing young academics and staffers that this old-line pension fund is dynamic enough to meet their demands won’t be easy. But for a company whose future so recently looked grim, that’s not the toughest problem imaginable.
Fixed-income investments, you said? TIAA’s got thousands of them. In 1991 they earned an average of 9.63 percent. Here’s a sample of the company’s far-flung portfolio, from bottling plants to cash.
$26 billion. The biggest chunk is in utilities, but holdings run from a Coca-Cola bottling plant ($40 million) to an oil-pump maker ($500,000).
$523 million. Includes partial ownership of more than 60 USAir jets, hundreds of train boxcars and shipping containers and even a few tankers.
$26 billion. TIAA targeted real estate during the ’80s and is now paying the price. One fourth of its loans and mortgages are in California.
$700 million. Not much is Uncle Sam’s debt. Borrowers like the Canadian Wheat Board and the government of New Zealand pay better.
$2 billion. Even a long-run investor needs to keep a little spare change around in order to pay interest, dividends and expenses.
