A lesson learned: TIAA-CREF once owned the educator retirement savings market. New competition led to a studied new approach to promoting the brand.

The scene is a packed university lecture hall. Students focus on the professor at the front of the room. The background music: "There's a Place for Us." The message: TIAA-CREF provides financial services for the greater good.

This is one in a series of television commercials promoting TIAA-CREF, or Teachers Insurance and Annuity Association-College Retirement Equities Fund, the largest private retirement system in the United States with $345 billion in assets. The ad campaign, intended to reinforce the company's name on campuses and spread it beyond academia to the general public, is just one sign of the major changes that this 86-year-old company has undergone recently in its drive to become leaner, more responsive to customers' needs and more adroit as a competitor.

It's not that TIAA-CREF intends to expand beyond its core markets of higher education, research, cultural institutions, private K-12 schools, and not-for-profit hospitals. But the company's market share, once close to 100%, is now an estimated 70%. Vendors Fidelity, Vanguard and the Valic unit of American International Group Inc. have been drawing new investors and now the need for broader name recognition is extremely important to company officials. They realize that while TIAA-CREF is well-known in its core markets, it's not a household name for the staffs in many benefits offices who increasingly are coming into client institutions from other areas of the private sector.

Targeting the Message

The company launched its national ad campaign in August 2004 during coverage of the Summer Olympics, a high-profile choice after research revealed that an estimated 70% of its target audience would likely be viewers, said Jamie DePeau, vice president for marketing.

"We have a difficult audience to reach," she said. "They are very selective in the media vehicles that they use and as a result, you will see us selectively using media. You won't see us in a lot of programming where you'll see other companies."

The timing was perfect, too, because it preceded open enrollment season on campuses, DePeau said.

The ads also have shown up on specialty programming such as televised college football and basketball games. With its unique audience, TIAA-CREF is likely to choose air time during the Macy's Thanksgiving Day parade, Kennedy Center honors, or programs on the National Geographic or History channels, she said.

The ad campaign uses television in combination with print and radio to build awareness, and direct marketing primarily as a channel for sales, DePeau said. Research throughout the campaign has shown that TIAA-CREF is reaching its goal of greater brand recognition, she said.

The new, national ad campaign is one of several strategic initiatives the company has implemented under the leadership of Herbert M. Allison Jr., who became chairman, president and chief executive officer in late 2002.

Finding the Funds

Another is a major cost-cutting effort aimed at allowing the company to invest more in delivering individual financial planning and advice services. TIAA-CREF always had a low cost model, but in the late 1990s through 2003, the cost structure crept up and assets were flat. That translated to an expense problem. So for two years, TIAA-CREF has been finding ways to carve out about $300 million in what it calls legacy costs from some $1.45 billion in expenses. It became standard operating procedure for the chief financial officer to pore over spending reports across the organization, question the need to refill open positions when they emerged, and study job functions for opportunities to streamline work and reallocate resources.

This is not simply a case of cutting back, Allison emphasized. "What it's done is reduce the cost-spending we didn't need so we could reallocate that spending toward what we think are strategic initiatives and in the process also bring down our expense ratio--that is, the ratio of our expenses to the assets we manage," he said. "We have reduced that ratio pretty dramatically from about roughly 54 basis points--a little more than 1/2 of 1%--down to about 44 basis points at the end of last year. And we anticipate that ratio continuing to decline"

The first companywide restructuring in September 2003 led to 500 layoffs--"a very difficult, very painful process for everybody," Allison said, "but it's necessary because these cost cuts are allowing us to invest in new products and services, and move closer to our clients by opening up new offices. We've more than doubled the number of offices we have throughout the country. It also allows us to improve our technology and do more marketing."

Total headcount is down 14% now, but in back office operations, it's down by 21%. The ultimate goal is to have 50% of the company's positions geared to client services.

"It's been an incredible transition," said Barry Johnston, director of business services/controller for Washington State University. "Certainly, there's a lot of competition out there nibbling away at their resources."

Johnston is an administrator who participates on the TIAA-CREF Advisory Council, which is made up of benefit officers, human resources directors and business people from some of the major institutions that the plan serves. The company established the group in 1988 and uses it as a sounding board for the products, services and marketing strategy that TIAA-CREF is considering, Johnston said.

Supplementing Service

The company began to take the initiative in the late 1990s to add more programs, Johnston said. "They now have done what the faculty has asked of them--to provide a variety of products," he said.

He also likes their recently improved accessibility to clients with the opening of regional offices providing more in-service training. But the overriding factor for him is the lower basis points for a product delivered by TIAA-CREE which does not have commissioned salespeople. "That's where TIAA nailed the market," he said.

Allison's arrival on the scene also has had an impact on the company's culture, executives said.

"The culture is vastly changed and I think Mr. Allison is the driver of that," said Susan Ulick, head of the equities department. "He has been an agent of transformation. He's critically open and receptive to ideas and gives you tremendous support. People feel that we are unlocking this vast treasure trove of resources. I think there is an excitement, an enthusiasm, an energy in this organization."

The abiding culture at TIAA-CREF always has reflected a not-for-profit spirit that seeks to do the right thing for the plan's participants, who are the company's owners. That means that TIAA-CREF doesn't confront the economics trade-off that the rest of corporate America has to face in placing shareholders before customers. "Our customers, our participants come first," Ulick said. "They're why we exist."

Most in the company agree that TIAA-CREF also needs to move toward a performance culture--a meritocracy with pay and promotion related to job performance, diversity at all levels, the ability to learn and grow on the job, and authority matched to accountability, Allison said. "We want a culture that is open, honest, more entrepreneurial and less hierarchical," he said, adding that this change is about responsiveness to clients' needs.

Allison expects all the pieces of the restructuring to fall into place by the beginning of 2007. "At that point, we should be able to grow in our core market more rapidly than we have been able to in the past," he said, which in turn should help TIAA-CREF "reassert the superiority of our market offering for our clients in comparison to our competitors."

Key Points

* Pension fund giant TIAA-CREF, is in the midst of major changes in its drive to become leaner, more responsive to customers' needs and more adroit as a competitor.

* The company recently launched a major national advertising campaign to build name recognition beyond college campuses to the general public.

* It also has cut $300 million in expenses, and is reallocating those resources to provide enhanced services for plan participants.

Minding the Risk

After Herbert M. Allison Jr. came to TIAA-CREF as its chairman, president and chief executive officer in 2002, he created several new positions including enterprise risk officer, a post he filled with Erwin W. Martens, executive vice president for risk management. A veteran risk manager, Martens gained experience at Putnam Investments, Lehmann Brothers and Credit Suisse Group in Zurich.

From the start, he was on the nine-member executive team that reports directly to Allison.

"As enterprise risk officer, I have oversight

over issues with respect to investments" Martens said. This includes market risk, credit risk, counter party risks, operational risk, safety and security, and business continuity.

He sees his role as constructive critic inside the organization, someone designated to look into virtually everything and ask why it doesn't work as it should or, if it does, whether improvements could be made.

Martens also strives to bring greater transparency to the organization. Every time TIAA-CREF's three boards meet, they hear reports from him as well as the chief compliance officer and the chief audit officer. "I think that is probably now well accepted within the organization" he said.

Since he has been on the job, Martens has been a catalyst for change. For example, he has conferred with people in the investments and information technology departments, advising them of ways that they can make company information available more quickly to the pension fund's participants for greater transparency. He's also talked with finance and investments staffers about asset allocation and asset liability management, and has introduced concepts that link the two together.

"In many ways, we are providing a sort of glue between existing areas, each of which was operating before, but we bring in a slightly different perspective and allow people to see things in a different way, which enhances both of their operations," he said. "My objective is to initiate a lot of those things, enhance the environment and then basically let the principals go back and do their jobs. I don't do risk management for people; they do it for themselves."

His work with investment professionals has the greatest financial impact on the organization, Martens said. As partners, he and his staff do not try to second guess the company's investors, but rather alert them to opportunities where they can get the same amount of return but by taking less risk. Done on a large-scale basis, Martens said this adds "an incredible amount of value"

For example, after the bubble burst on technology and airlines stocks in 1990 and 2000, a new and different credit cycle emerged. By introducing a more evolved state of credit assessment, Martens and his staff hope that TIAA-CREF will experience a much lower incidence of bad credit in this and subsequent credit cycles.

"That doesn't preclude our investment people from buying credit, but hopefully together with our participation, we'll buy credits that will be less subject to downgrades and defaults than had we not had some of these efforts around credit risk management," he said.

Making the Money Work

TIAA-CREF works to grow its participants' money through investments in stocks and real estate. Reportedly one of the largest institutional real estate investors in the nation, the retirement system has a global portfolio of direct or indirect investment of $50 billion. The company maintains three equity investment portfolios in that area, said Thomas Garbutt, managing director and head of real estate.

One is the general account of the life insurance company, which has about $7 billion of directly owned real estate on a gross basis, he said. The strategy is to take a balanced approach seeking core assets as well as core plus and value-added opportunities within the fund. "We have the ability to look for additional yield in that account," he said. All investment activity in foreign real estate occurs with the general account, which also invests domestically, he said.

The second portfolio involves the TIAA Real Estate Account, which is a core account that participants can elect to join. This, too, is about $7 billion. "Participants can elect to invest in the account at any time and have the ability to withdraw funds quarterly," Garbutt said, adding that here the investments are well-leased, stabilized assets throughout the United States.

The third product is called the Core Property Fund. Launched in August 2004, it is geared to institutional investors such as endowments, foundations and pension plans. From an investment perspective, this fund is similar to the TIAA Real Estate Account, but the two differ in clients, Garbutt said.

Across all the accounts, the investment philosophy is to look for high quality real estate in markets that have positive job growth projections with supply constraints for new product, either by local zoning or geographic boundaries. "That positions us essentially to go into markets where we will see attractive upside in our properties," Garbutt said.

Commercial properties in which TIAA-CREF will invest include office buildings, warehouses, regional malls, and shopping centers that have a supermarket as an anchor. They also buy multifamily rental buildings, usually in sub-urban areas. With overseas investments, the company is heavily involved in London and Paris properties right now.

Some flagship properties owned by TIAA-CREF are Franklin Square, "arguably one of the best buildings in Washington, D.C.," and the Mazza Gallerie in Chevy Chase, Md., Garbutt said.

On the equities investing side, the mission is to maximize the balance of participants' savings in preparation for retirement, said Susan Ulick, head of equities. "We are not there to maximize investment fees or advisory activities, but to help our participants save for retirement," she said. "That leads us to recommend certain strategies to the clients that maybe people who are not low-fee oriented would shun"

The most important element of a successful investment plan is one that is very well crafted to execute asset allocation, Ulick said. Her department's strategy is to diversify assets, encourage clients to rebalance them regularly and make asset allocation changes that are strategic rather than tactical, she said.

TIAA-CREF will offer index funds as well as other funds to meet pure exposure criteria. But the company also believes in actively investing because, if done correctly, it can add incremental return above index funds, Ulick said. That's what differentiates them from competitors who rely heavily on index funds, she added.

The company employs 12 traders on the equities side. On the fixed income side, TIAA-CREF has 15 traders, and some portfolio managers also perform this function. The equity traders buy publicly traded assets, which are about 80% domestic and the rest international, Ulick said.

"The trading organization is charged with minimizing the cost of trading because that ultimately is borne by the client portfolios and it can impact return" Ulick said.

The company is planning a major investment in the equity investment team that will add 20 analysts and eight to 10 portfolio managers over the next two to three years, Ulick said. This will "broaden and deepen that team" she said, "and much of the resources will go into what we are trying to do in the international area--very important when you are a global investments organization"

TIAA-CREF Fast Facts

* In 1918, the Carnegie Foundation established Teachers Insurance and Annuity Association of America (TIAA), with an endowment of $1 million from the Carnegie Corporation of New York. The mission: to provide life insurance and retirement plans to professors and employees of colleges and universities. By the end of its first year, 30 institutions had signed on.

* In 1952, TIAA launched the College Retirement Equities Fund (CREF), the world's first variable annuity. This method of managing retirement savings and income was considered radical at the time, but was later adopted by many companies and retirement systems.

* The company has a unique governance structure. Since TIAA and CREF are separate companies, created under different laws and regulated by different government agencies, each has its own board of trustees. Above both boards are the TIAA and CREF Boards of Overseers. And TIAA-CREF affiliates have their own governance structures.

Learn More

TIAA-CREF

A.M. Best Company # 07112 (Teachers Insurance and Annuity Association of America)

Headquarters: New York, with major offices in Charlotte, N.C. and Denver

Lines of Business: Annuities, life insurance, institutional asset management, investment, retirement and education savings products

Participants: 3.2 million

Net Gain From Operations (2003): $1.3 billion

Assets Under Management (as of Feb. 2005): $345 billion

Total Income (2003): $29 billion

Operating Expenses (2003): $951 million

Distribution: Direct, through clients' payroll deductions

Source for Financial Data: TIAA-CREF For ratings and other financial strength information about this company, visit www.ambest.com.

Launching a Brokerage Platform

TIAA-CREF is launching a new brokerage platform this month for all of its 3.2 million clients. It's a step that these investors have been requesting for a number of years, said Doug Chittenden, head of the individual wealth management products division.

In his view, this is yet another indication of how the company has become a more responsive, flexible and nimble organization as a result of the restructuring plan it undertook in September 2003.

But well before that, the company was moving to answer clients' needs in the face of growing competition. In the past 15 years, TIAA-CREF has expanded from a $70 billion organization serving 1.2 million participants to a $345 billion company. Along the way, the once-limited number of product offerings has expanded as well.

That's mainly because investors have been demanding more than retirement products from TIAA-CREE said Chittenden, who is responsible for a portfolio that includes mutual funds, after-tax annuities, the brokerage and IRA platforms as well as the trust company, all directed toward Individual investors.

"Clients are saying we need to provide an integrated, more detailed and in-depth set of solutions," he said. "We've heard that consistently for the past decade and we've been moving fairly consistently toward broadening our offering."

As far as life insurance is concerned, change is happening there as well. "The insurance needs of our customers are really not that different than those of the general public," said Bret Benham, head of insurance and financial protection products. "And of course, there are many competitors for them to choose from in the marketplace. In keeping up with their insurance needs as their financial assets grow, we are expanding our product offering and further improving our competitive product portfolio."

Under the recent restructuring, an entire division, called client services, is dedicated to meeting the needs of investors. "They are our primary conduit to our core pension customers," Chittenden said.

Previously, the company was organized around independently managed product lines. Now, in addition to the client services division, there are the product management division, where Chittenden and Benham work, and the investment management division.