pensions once again

["Devine, James" <jdevine@xxxxxxx>]

[My pension dollars at work.]	

Hello, Mr. Blue Chips
TIAA-CREF gets a money makeover.
By Daniel Gross

SLATE/Posted Tuesday, Nov. 18, 2003, at 7:53 AM PT

The financial adviser to the wine-and-cheese set is undergoing a money
makeover. A year ago, TIAA-CREF, the $300-billion-asset not-for-profit
company that invests on behalf of university professors and nonprofit
employees, brought in a new, high-priced Wall Street chief executive:
Herb Allison, the former president of Merrill Lynch. It bestowed upon
him an uncharacteristically rich contract, the details of which were
disclosed last week. 

In the past two months, Allison's strategy has become evident. In
September, TIAA-CREF laid off 500 employees-about 8 percent of its
staff-as part of a reorganization. Then, in October, it opened its first
branch retail offices, in Princeton, N.J., and Hamden, Conn. TIAA-CREF
has plans for several more. Staffed with financial advisers, the centers
will become platforms for TIAA-CREF to sell new products and services
both to existing TIAA-CREF customers and to new ones. Last week
TIAA-CREF ditched Ogilvy & Mather, its advertising agency of 17 years,
and hired an edgy startup firm in Boston, Modernista. TIAA-CREF intends,
as the New York Times reported, to increase its advertising spending
"significantly" from last year's $25 million total.

These moves-textbook for a financial services company-may seem odd for a
not-for-profit institution that, for nearly a century, has defined
itself in opposition to Wall Street's modus operandi. Founded by Andrew
Carnegie in 1918, TIAA (it stands for Teachers Insurance Annuity
Association) began offering annuities and pensions for university
teachers. As academic institutions established pension programs, they
turned to TIAA to manage them. After World War II, when inflation was
high, TIAA-which invested mostly in bonds-decided to begin investing in
stocks as well. In 1952, it created the CREF (College Retirement
Equities Fund) Stock Account.

Over the past half-century, this glorified index fund has grown into one
of the single largest pools of capital in the stock market-about $88
billion today. Like public employee pension funds, TIAA-CREF has thrived
in recent decades because the number of employees at nonprofits, and in
state government and education systems, has continued to grow over the
years. As important, the entities that employ them continue to meet
obligations to fund their pensions-unlike many private sector companies,
which have switched to 401(k)s. TIAA-CREF now has the retirement funds
of 2 million people in its hands and is among the nation's largest asset
management companies. 

TIAA-CREF has always viewed its position as that of a trustee, since its
academic clients typically didn't have much choice-or, frankly,
interest-in how their pension funds were invested. Its customers are, by
and large, presumed to be unsophisticated investors-"people with other
things to think about," as the recent advertising slogan put it. Things
like Baudrillard, or String Theory. In keeping with its ethos, TIAA-CREF
has been the campus protester of Wall Street, calling attention to poor
corporate governance and excessive executive compensation. TIAA-CREF's
image as a no-frills, no-nonsense, long-term investor has left it with a
sterling reputation.

Herb Allison is cut from a distinctly different cloth than previous
TIAA-CREF chief executives, most of whom were university administrators.
His immediate predecessor, John H. Biggs, a Ph.D. in economics, was an
insurance executive who spent a substantial portion of his career as a
finance executive at Washington University of St. Louis. But Allison's
arrival marks a transition away from tweediness that may have been
unavoidable. 

Today, TIAA-CREF's investors-many of whom came of professional age in
the market-friendly 1980s and 1990s-aren't nearly as passive as they
once were. Increasingly, they have choices as to the investment of their
retirement plans. And other asset management companies have long been
eager to horn in on this business. TIAA-CREF's educational background
may have made it a natural to manage many of the so-called 529 college
savings programs established by states. But last summer, New York pulled
its funds from TIAA-CREF and awarded them to Vanguard Group, one of the
few money management outfits able to offer lower expenses than
TIAA-CREF. Meanwhile, prior efforts by TIAA-CREF to branch out-by, for
example, offering mutual funds to the general investing public in the
late 1990s-haven't paid dividends.

At TIAA-CREF, Allison is receiving a Wall Street-sized salary, on a par
with those received by the heads of large insurance companies. His
compensation includes a $1 million base salary, a $3 million performance
bonus for 2003 to be paid in early 2004, plus guaranteed long-term
compensation of $4 million. The icing on the cake: a fat $24 million
severance payment if he's booted out without cause by November 2004.
With the huge severance and guaranteed performance provisions, it's the
sort of compensation package that TIAA-CREF's team of shareholder
activists might carp about.

These are risky moves. It could be that TIAA-CREF branches will over
time become, like used-book and vintage clothing stores, fixtures in
college towns. But all of these initiatives-the Wall Street boss, the
souped-up advertising, and the bricks-and-mortar outlets-cost money. In
the asset management business, every penny not spent by the management
company is a penny earned for investors. And you don't have to be an
economics professor to know that over a 30-year period, the extra
expense of a few pennies on every hundred dollars can end up making a
significant difference in total return. 

In addition, by choosing an executive who is a product of Wall Street,
TIAA-CREF may become less temperamentally inclined to stir up
trouble-precisely at a time when rabble-rousers are needed. Allison left
Merrill Lynch when he lost out on the succession derby in 1999, early
enough to avoid much of the taint of the post-1990s scandals. But in
recent years, Merrill's record for developing executives who are willing
to buck the system on behalf of modest shareholders has been rather
poor. What the recent mutual fund scandals should serve to alert us to
is that we need people at the helm of massive pools of money who can
speak truth to power.

Daniel Gross (www.danielgross.net) writes Slate's "Moneybox" column. You
can e-mail him at moneybox@xxxxxxxxx

------------------------
Jim Devine jdevine@xxxxxxx &  http://bellarmine.lmu.edu/~jdevine