For the first time it has opened a storefront office encouraging walk-in traffic. It is offering more comprehensive and personalised financial advice. It is dramatically cutting expenses, laying off 8% or 500 of its 6,500 employees. In other words, the 85-year old Teachers Insurance and Annuity Association College Retirement Equities Fund (TIAA-CREF) is changing from a non profit organisation towards a market-oriented model.
In the US, TIAA-CREF is a leading provider of financial services and is the premier pension system for people employed in higher education and research. It serves 2m participants and 15,000 institutions. It has $290bn (E000bn) in assets under management. Because of its size and reach its moves are carefully followed by competitors, which during the last 10 years have successfully eroded its market share.
The last apparent alarm bell for TIAA-CREF rang in August 2003, when the New York based organisation lost the management of the New York State 529 college-savings plan. The contract went to Vanguard and to Columbia Management Group (a unit of FleetBoston Financial), which offered lower costs. Besides, TIAA-CREF is losing clients also among younger college staff members who can opt for Vanguard or Fidelity pension plans.
High costs and low performances are indeed the most important problems facing TIAA-CREF. While assets under management are more or less at the same level they were on its peak year in 1999, the number of employees has increased by around 1,400 people and the funds’ expense ratio has gone up to 0.49% from 0.35%.
The new chairman and chief executive officer Herb Allison, 60, is trying to address these issues and transform TIAA-CREF into a more efficient, more flexible, less bureaucratic company. He comes from Merrill Lynch, where he worked for 28 years until he was told he would not become Merrill’s Ceo; after resigning in 1999, he served as finance manager for the presidential campaign of Senator John McCain and ran a non profit online education venture.
Allison is a proponent of modern technology and among the worst inefficiencies he has discovered at TIAA-CREF there was the computer department, which accounted for 29% of total expenses: they were using 27 servers, 500 computer languages and 450 printing vendors. So many of the recent job cuts have been made in this area.
“We will focus our actions on delivering varied products and services to distinctive customer segments and instilling a performance culture within TIAA-CREF”, wrote Allison in an internal note to explain its new strategy.
Talking about products and services, Allison is trying to widen the array of offers and to improve their quality. Effective this year he has abandoned the policy of offering only in-house mutual funds to his clients, who can now choose several funds managed by competitors, including Vanguard: in the end TIAA-CREF may become an ‘open architecture’ platform. On the other hand Allison has looked into the investment process for TIAA-CREF equity portfolios in order to enhance their performances, which in the last few years have not been very brilliant. The revamped TIAA-CREF mutual funds, which have been directly marketed to the general public since 1997, will also be sold through other financial-services companies and through a new TIAA-CREF national network of 50 storefront offices. The very first one was opened in October in Princeton, New Jersey, a State where TIAA-CREF has partnerships with more than 350 education and research institutions. The next ones will be in Charlottesville, Virginia and in
Hamden, Connecticut.
To implement his vision, Allison has hired six new top level executives. But early in 2004 Allison will have to find also a new chief investment officer, because the very well known and respected Martin Leibowitz will retire.
Allison’s changes will be discussed at the company annual meeting on November 13. Some dissident members plan to criticise him because he does not look very committed to corporate governance activism, which has long been a TIAA-CREF tradition; they fear he wants to “Merrillise” an institution whose old top value was “a good reputation”. But for the time being the board is behind Allison and also outsiders still back TIAA-CREF: “They are still the gold standard,” says Vanguard founder and indexed funds’ guru John Bogle.