Teachers Insurance and Annuity Association-College Retirement Equities Fund
Teachers Insurance and Annuity Association-College Retirement Equities Fund
Incorporated: 1918 as Teachers Insurance and Annuity Association; 1952 as College Retirement Equities Fund
Total Assets: $281.38 billion (2001)
NAIC: 524113 Direct Life Insurance Carriers
TIAA-CREF, or the Teachers Insurance and Annuity Association-College Retirement Equities Fund, was ranked as the nation’s 33rd largest company by Fortune in 2001. The company’s CREF Stock Account, with $92 billion in assets, is the largest single-managed equity fund in the world. From TIAA’s original endowment provided by the Carnegie Corporation for the benefit of private college professors, total TIAA-CREF assets have grown to over $250 billion, and the nonprofit company has begun offering financial products to the general public as well as to its core education and research community.
Financial Security for Poorly Paid Teachers: 1910s-20s
The concept of institutionalized pension funds and retirement security only became an issue in industrialized society. In the pre-industrial world older individuals were provided for either by their children or through the local church. Limited pension plans did exist in the United States before the 20th century, but they did not become common until the 1910s. For some in the United States, the concept of pensions threatened the American ideal of personal liberty and accentuated fears of a paternalistic government. In 1861, however, the government did provide pensions to those who served in the Civil War. A few private corporations had annuity plans beginning in 1875. By 1932, however, only 15 percent of U.S. workers were covered by a retirement plan. Corporate pension systems were not always established out of concern for the workers but rather as a means to reduce employee turnover and to promote loyalty, or to control employees.
In 1890 Andrew Carnegie, as a newly appointed university trustee, became concerned over the lack of compensation received by college teachers. He saw that their small salaries did not permit them to accumulate savings for retirement. Only a few universities and colleges had initiated retirement plans or funds, but they generally assisted only those professors who remained employed with the institution for longer than 15 years. These systems varied, with plans such as that of Columbia University, which allowed retirement at one-half salary after both 15 years of service and after attaining the age of 65. Carnegie became convinced of the need to provide pensions for college teachers through discussions with Henry Smith Pritchett, president of Massachusetts Institute of Technology. Pritchett and Carnegie recognized that retirement pensions could strengthen higher education by improving the financial security of college teachers. The result was the founding in 1905 of the Carnegie Foundation, reincorporated under a federal charter as the Carnegie Foundation for the Advancement of Teaching in 1906.
Originally endowed with $10 million from bonds issued on Carnegie’s United States Steel Corporation, the Carnegie Foundation became the major provider of pensions to college teachers in private, nonsectarian institutions meeting certain academic and financial requirements. In 1908, Carnegie increased the endowment by $5 million to extend the Carnegie pensions to teachers in state universities, bringing the total gift to $15 million.
The original 52 member institutions included the major private universities in the United States and Canada in 1906. Among the charter members were Amherst College, Columbia University, Cornell University, Harvard College, Johns Hopkins University, Massachusetts Institute of Technology, McGill University, Princeton University, Radcliffe College, Vassar College, and Yale University. A few of these initial member institutions already had pension funds but saw the usefulness of a more integrated system.
The post-World War I era saw a rapid increase in both institutional members and in individual participants at those institutions. By 1915 membership had increased to 73 public and private institutions, and the foundation realized it no longer could support additions to this free pension system. In 1916, the foundation proposed a “comprehensive plan of insurance and annuities,” based on a philosophy of joint responsibility and cooperation between the college and the teacher.
In its broad outline the proposal followed the recommendations of a recent Massachusetts commission on public-employee pensions, praised in the foundation’s 1914 annual report. The Massachusetts commission had recommended contributory pensions, with individual ownership of annuity contributions and equivalent contributions to the annuity by the government as employer. In 1917, the foundation established the Commission on Insurance and Annuities, which included representation from such organizations as the American Association of University Professors, Association of American Universities, National Association of State Universities, and Association of American Colleges, to explore the proposed plan.
The commission defined and unanimously approved the principles of a sound pension system and recommended establishment of a new Teachers Insurance and Annuity Association. In 1918, TIAA was incorporated as a nonprofit life insurance company under New York state law. The capital stock of TIAA was held by the Carnegie Corporation, which provided the $1 million endowment.
The usual method of contribution for TIAA annuities was joint payments divided equally between the individual and the individual’s employer. Contributions usually averaged 10 percent of the salary, 5 percent each from the employer and the employee. Because of this structure, TIAA employed no agents and paid no commissions. This arrangement helped to keep operating costs low, an advantage for educators.
The new corporation was led by President Henry Smith Pritchett. Pritchett, president of the Carnegie Foundation for its first quarter-century, guided the transformation of the free pension system. Under his leadership the foundation also conducted pension studies and established a separate division for an educational-studies program. He viewed pensions as a means of strengthening higher education and, by enabling older professors to retire with dignity, as a method of enticing and retaining younger faculty. The new board of trustees consisted of individuals from academia, finance, and business. It included people from Columbia University, University of Toronto, McGill University, the Mutual Life Insurance Company of New York, the National City Bank, J.P. Morgan & Company, and, of course, the Carnegie Foundation for the Advancement of Teaching.
Great Depression and Impact on Pension Programs: 1930s
The 1920s brought relative security and prosperity to TIAA. The Depression loomed at the end of the decade when W.O. Miller, comptroller of the University of Pennsylvania, predicted in the Educational Review, “It is only a matter of time when institutions of higher learning will find that their responsibility for the protection of teachers and their dependents against the major hazards of life will be inescapable.” The Great Depression accentuated the need for security. TIAA retirement funds, growing in popularity, took several forms. In TIAA’s early years, colleges and universities often had made participation in the retirement plan voluntary, but this trend reversed in favor of compulsory participation during the 1930s. Voluntary participation may have encouraged nonparticipation if the university did not provide support services, such as a contact to explain the details. This was especially true during the Depression years of the 1930s, when premiums increased because, as schools experienced financial difficulties, new business fell dramatically. Between 1925 and 1935, however, the number of annuity contracts grew fourfold.
By 1935, 105 of 117 colleges that did require joint contributions participated in TIAA. Henry James, the president of TIAA in 1935, urged institutions to act as guiding forces in providing for the security of their employees. Henry James’s observations changed the nature of TIAA, from playing a passive investment role to a more active role in disseminating information and advising. He urged colleges to have an officer or a staff benefit committee for disseminating information about insurance and annuities to employees. James was a man dedicated to academia. Having won a Pulitzer Prize for biography in 1930, he was a trustee in the Rockefeller Institute, Carnegie Corporation, and New York Public Library, and a fellow of Harvard University.
TIAA-CREF’S financial strength is based on the innovative investment strategies and low-cost philosophy that we have developed in response to changes in the global marketplace. Our financial strength is also rooted in the reliability and claims-paying ability of TIAA’s Traditional Annuity, which has paid dividends for over fifty consecutive years. TIAA’s investment approach has consistently produced strong returns while maintaining TIAA’s historic stability of principal.
The Social Security Act was passed in 1935, providing for the first national old-age pension. Retirement benefits were first paid in 1940. National, compulsory, and contributory, Social Security was designed to soften the effects of the massive unemployment of the Depression, provide long-term security, and remove older employees from the workforce. Social Security did have many flaws and has been amended many times since its founding. The act excluded, among other groups, individuals working at colleges and universities. Colleges initially had requested the exclusion, concerned about the budgetary implications and wary of government interference in educational affairs. TIAA urged colleges to reconsider their position, noting the importance of Social Security benefits for nonacademic college employees. Although professors were provided for under TIAA plans, most of the college or university support staff had no retirement benefits. Beginning in the late 1930s, TIAA encouraged extension of Social Security participation to college and university employees; this finally was achieved in the 1950s. TIAA’s position was that Social Security represented a national social movement toward economic security, deserving of colleges’ cooperation and participation.
In 1938 TIAA was given corporate independence. For its first two decades, TIAA had received grants from the Carnegie Foundation and then Carnegie Corporation to pay its operating costs. As the volume of TIAA’s business increased, TIAA and Carnegie Corporation agreed that long-term philanthropic support of TIAA annuities was no longer necessary or desirable. A separation settlement, a series of payments through 1938, was made and TIAA’s stock transferred from Carnegie Corporation to a newly chartered board, Trustees of T.I.A.A. Stock, now known as the Board of Overseers.
Postwar Boom: 1940s-50s
The war years of the early 1940s brought little growth to TIAA. The postwar years, however, saw a dramatic increase in college enrollment because of the GI Bill. The demand for college professors increased accordingly, as did TIAA’s policyholders, from 39,250 at the end of 1945 to 45,000 in 1946. An increasing number of institutions were willing to provide for nonacademic employees’ retirement because of the exclusion of colleges from Social Security coverage. TIAA retirement plans increased by 45 in 1945. An additional 123 were added in 1946 and 1947.
By 1947, in a substantial number of colleges, 15 percent of the individual’s salary was contributed to the pension fund, with the staff member and the college each paying half this amount. By 1950, TIAA had $299.6 million in assets.
In 1950, the Association of American Colleges and the American Association of University Professors (AAUP) polled college administrators and active and retired faculty on retirement issues. Of those surveyed, 54 percent indicated that their benefits were adequate. A large majority of AAUP chapters, however, argued that benefits were too meager in light of inflation. The report urged some provision for cost-of-living pension increases. Other issues in the study were the lack of fixed age for retirement, and who would fix the age; and the payment of benefits to those who either retired early or left the profession. These issues would surface again in the 1980s.
A partial answer to the problem of inflation was the variable-annuity corporation College Retirement Equities Fund (CREF), formed by TIAA in 1952. CREF was designed to provide benefits based on the fluctuations of the cost of living as reflected in the movement of the stock market. TIAA also may have been attempting to regain part of the insurance market lost to investment companies that were posting higher rates of return than the fixed TIAA annuities. CREF was the nation’s first variable-annuity organization. CREF was chartered through a special act of the New York state legislature. Like TIAA, CREF was established as a nonprofit organization dedicated to serving the nonprofit educational community.
Membership in CREF was restricted to current TIAA members, of which 20 percent had elected to join by 1954. Participating TIAA institutions had three options: to stay solely with the fixed-dollar TIAA annuity, to participate in CREF but limit the amount its employees could invest in CREF to a specific percentage of total contributions, or to allow individuals to put up to 50 percent of their retirement premiums into CREF, with the balance to TIAA. Most institutions joining CREF chose the third option. The structure of CREF was designed to assure the employer that his contributions would be used as an annuity.
In the latter half of the 1950s, TIAA-CREF expanded its insurance operations. In 1956, TIAA received a $5 million grant from the Ford Foundation to develop group total disability and major medical insurance coverages. Such coverages would insure against the expenses associated with long-term disability and major catastrophic illness. These plans were used as a further means of attracting and retaining quality employees.
A Myriad of Challenges: The 1960s Through the Early 1990s
In 1969, TIAA-CREF briefly sought a federal charter for College Benefit System of America, intended to solve TIAA-CREF’s problems at that time with state licensing and taxation of insurance companies outside of New York. TIAA-CREF dropped the federal charter effort, however, as more states supported tax-free licensing for TIAA-CREF’s annuity business.
In 1971 TIAA-CREF, with Ford Foundation grant support, organized The Common Fund for nonprofit organizations, to provide small colleges with expert investment management of their endowment funds. In 1972 TIAA-CREF joined with colleges and other organizations to establish the Investor Responsibility Research Center, for the study of social-responsibility issues and portfolio investments.
- Teachers Insurance and Annuity Association (TIAA) is incorporated as a nonprofit life insurance company with a $1 million endowment from the Carnegie Corporation.
- TIAA receives corporate independence, ending two decades of direct Carnegie support.
- TIAA forms College Retirement Equities Fund (CREF), the nation’s first variable annuity.
- TIAA-CREF joins with colleges and other organizations to establish the Investor Responsibility Research Center.
- New Chairman and CEO Clifton Wharton, Jr., reorganizes operations in response to increased criticism over pension fund performance.
- Introduction of long-term care insurance follows string of late 1980s product innovations.
- TIAA-CREF loses tax-exempt status.
- TIAA-CREF begins offering mutual funds to all investors.
In 1978, technical amendments to the Employee Retirement Income Security Act of 1974 (ERISA) opened up other profit-making funds for retirement purposes. IRAs (individual retirement accounts) were an outgrowth of ERISA. Growing dissatisfaction with the lack of investment choices became the major complaint of participants. As early as 1983, CREF’s performance was criticized as being 54 percent poorer than most pension funds, by one analyst, Pensions & Investment Age (June 13, 1983). In that same year the National Association of College and University Business Officers (NACUBO) established a committee to study TIAA-CREF. NACUBO issued an unfavorable report, and TIAA-CREF slowly began to consider proposals for changing its pension system.
TIAA-CREF studied the feasibility of introducing a new CREF money market account to complement the CREF stock account and the traditional TIAA annuity. Concurrently, management began the process of registering CREF with the Securities and Exchange Commission (SEC) in preparation for the introduction of additional CREF investment funds. The SEC's approval was delayed in August 1987 when a number of parties—several colleges, competitors, and an educational association—requested a hearing.
Another controversy during the 1980s was over the issue of transferability and removal of retirement funds. TIAA-CREF would not allow transfer of funds from the CREF portion, earning interest from the performance of the stock market, to the TIAA portion, earning fixed interest. A policyholder could not withdraw funds to invest in another plan or annuity to gain a better interest yield. In 1988 universities such as Johns Hopkins began offering alternatives to TIAA-CREF. While the impetus for these changes was the issue of the transfer or removal of funds, a secondary issue revolved around who would decide the risks the pension fund would take, TIAA-CREF management or the policyholders.
A major step in resolving these issues was the selection in 1987 of Clifton Wharton, Jr., as the chairman and chief executive officer. Wharton had served as president of Michigan State University, chancellor of the State University of New York—the nation’s largest university system—and held numerous directorships on corporate boards. He also served as a trustee of The Aspen Institute and the Council on Foreign Relations.
Wharton first reorganized the structure into four major divisions: TIAA investments, CREF investments, pension services, and insurance services. Before Wharton, the company had a myriad of departments that reported to seven vice-presidents. In 1988 consummation of an agreement with the SEC opened the door for introduction of the new CREF Money Market Account.
In 1989 TIAA opened life insurance eligibility to employees in public elementary and high schools. This program also increased the variety of TIAA’s life insurance services already available to participants. The organization introduced a new retirement income option, the Interest Payment Retirement Option. This plan pays annuity interest only, while the principal remains intact, giving participants flexibility to postpone their retirement decisions.
In January 1990 TIAA introduced its Teachers LongTerm Care insurance coverage, designed to allow educators and their spouses to retain financial security throughout extended periods of care in nursing homes, adult day healthcare centers, or at home. This coverage became one of the nation’s most comprehensive long-term care insurance programs. As of January 1, 1990, TIAA-CREF phased out its major medical insurance, which had been steadily losing business since the mid-1970s.
On March 1, 1990, TIAA-CREF announced the introduction of two additional funds—the CREF Bond Market Account and the CREF Social Choice Account. The latter invested only in companies that meet certain standards of social responsibility. The Social Choice Account, for example, did not invest in companies that had economic ties to South Africa or that produced and marketed alcoholic beverages or tobacco. Concurrently, TIAA-CREF made new options available to employer retirement plans, permitting CREF accumulations to be transferred or cashed in upon termination of employment, subject to employer approval.
Hence, TIAA and CREF entered the 1990s widely recognized as leaders in the pension and insurance industry, and as major institutional investors. TIAA’s investment performance long had been above the life insurance industry average. Together TIAA and CREF increased financial security and asset protection for educational employees. The future looked not only secure; it looked bright. TIAA-CREF, holding a captive market, was unique in providing a nationwide portable private pension for 1.4 million employees of some 4,500 nonprofit educational institutions. TIAA-CREF total assets topped the $100 billion mark late in 1991.
John H. Biggs succeeded Wharton as chairman and CEO, in early 1993, when Wharton was appointed U.S. Deputy Secretary of State. That same year TIAA-CREF introduced its corporate governance principles. Biggs and TIAA-CREF would later come under fire in regard to the execution of those principles.
Redefining Itself: Mid-1990s into the 21st Century
As a large corporate investor, TIAA-CREF exerted its clout. “Sometimes the targets are well chosen,” wrote Nick Gilbert for Financial World in July 1995. “TIAA-CREF, the largest pension fund in the nation, has fought long and hard against excessive executive pay and abuses of shareholder rights like greenmail and poison pills.”
Some critics began drawing the line when TIAA-CREF pressed companies to diversify their boards, balking against a perceived push for political correctness. Moreover, although TIAA-CREF’s own board was highly diverse in terms of sex and race, the trustees received substantial compensation. Biggs and Thomas Jones, the second in command, garnered salaries and bonuses significantly greater than similar pension fund operations, according to Gilbert’s article. TIAA-CREF responded to the criticism by pointing out that the company had to compete for top-level employees with major financial services corporations.
But not all critics were content with the answer. The flagship CREF Stock Account, an equity portfolio of $59 billion, was primarily indexed to the Russell 3000: CREF automatically invested nearly two of every three dollars in companies held by the benchmark fund. This, critics said, left little for the highly paid officers to manage.
In a different vein, TIAA-CREF stepped away from standard insurance practices of the time when it began offering individual life contracts, long-term care, and pension annuities to unmarried partners of the university employees it already covered. Typically, domestic partners had been excluded from insurance coverage except for some first- and second-to-die life policies. The move was eased by the fact that TIAA-CREF did not offer health insurance, which presented the most risk to insurers. Furthermore, the move by TIAA-CREF followed a trend in its university customer base begun in the 1980s to include domestic partners in benefit plans.
TIAA-CREF lost its tax-exempt status in 1997 as part of tax reform and thanks to intense lobbying by competitors. The change in status allowed the company to begin selling more kinds of financial products and expand its customer base.
In the fall of 1997, TIAA-CREF launched six mutual funds for its core education market. The financial industry itself was in a time of evolution. Legislation changes allowed for increased diversification: commercial banks moved into investment banking; insurers and banks entered into stock broking; and, the fund market found new players from all quarters, including TIAA-CREF.
When the new TIAA-CREF mutual funds were rolled out for the general public the next year, the response was less than stellar, despite low fees, top-notch customer service, and the company’s reputation for solid returns on investment. Barron’s partially attributed the slow pace to lack of advertisement, part of TIAA-CREF’s tradition of keeping costs low, and its longtime dependence on strong word-of-mouth sales.
Regardless, the world’s largest pension fund had begun repositioning itself to be a major player in the financial services sector. Two million customers provided a hefty base of potential buyers of its new products and services, including new life policies targeting wealthy individuals, trust services, and a state college savings program, which it would administer. In addition, TIAA-CREF pursued relationships with financial advisors who could recommend their products to a new pool of customers.
Watchers of the financial industry predicted that TIAA-CREF could and would compete head-to-head with the top mutual fund companies, such as Vanguard, the nation’s second largest and fastest growing fund firm. Burton J. Greenwald, a Philadelphia mutual fund consultant, said in a fall 1999 Business Week article, “No one has ever competed successfully with Vanguard.” He went on to say, “Now, for the first time, there is a competitor with enormous credibility.”
Both nonprofit companies, Vanguard and TIAA-CREF kept fees low, used stock indexing instead of hiring professional stockpickers, and provided quality offerings. In terms of other fund competitors, Fidelity’s Magellan ranked first; had TIAA-CREF been a fund company it would have ranked fourth overall. Conversely, the CREF $123 billion variable annuity was nearly twice the size of the Magellan mutual fund.
The year 2000 marked the end of a heady ride for the U.S. stock market. Internet and technology stocks, particularly, took it on the chin. Although TIAA-CREF’s real estate and bond accounts held up well, the company’s equity-based accounts declined in value, along with the general U.S. and international stock markets.
Despite the volatile financial climate TIAA-CREF remained a solid organization. In 2001, the company came in second in the Financial Services Reputation Quotient Survey, outranked by a player in the military and ex-military niche. Also in 2001, TIAA-CREF earned a second place position behind Metropolitan Life in terms of securities portfolio size: $86.82 billion compared with Met’s $101.1 billion. In addition, TIAA, held the top spot among the nation’s life insurers and was one of only four to hold the highest ratings from the nation’s four leading independent insurance industry rating agencies.
TIAA-CREF Life Insurance Co.; TIAA-CREF Trust Company, FSB.
Metropolitan Life Insurance Company; Prudential Insurance Company of America.
“The Biggest Fund You Never Heard Of,” Business Week, September 13, 1999, p. 152.
Davis, L.J., “$60 Billion in the Balance,” New York Times Magazine, March 27, 1988.
Gilbert, Nick, “Glass Houses: People Who Live in Them, Like the Bosses of TIAA-CREF, Shouldn’t Throw Stones,” Financial World, July 4, 1995, pp. 26+.
Gjertsen, Lee Ann, “TIAA-CREF: Professors’ Pension Fund Rates No. 2,” American Banker, May 25, 2001, p. 9A.
Greenough, William C., It’s My Retirement Money, Take Good Care of It: The TIAA-CREF Story, Homewood, III.: Richard D. Irwin, 1990.
Koco, Linda, “TIAA Accepting Ins. Apps. for ’Domestic Partners,’ “National Underwriter Life & Health—Financial Services Edition, February 6, 1995, pp. 21 +.
“Lesson Plans,” Economist, May 2, 1998, pp. 67 +. “Let Shareholders Decide This One,” Business Week, November 19, 2001, p. 144.
“Top 150 U.S. Life, Accident, and Health Insurers by Size of Securities Portfolio,” American Banker, September 5, 2001, p. 7.
Ward, Sandra, “Playing with Fire,” Barron’s, January 11, 1999, pp. F5 +.
Whitford, David, “What Would You Do with $89 Billion,” Fortune, July 21, 1997, p. 31.
—Jenny L. Presnell
—update: Kathleen Peippo
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