The global economic crisis has proved the value of TIAA-CREF’s fundamental model, says the company’s president and CEO.
TIAA-CREF, the financial services company that manages retirement portfolios for professionals in academia and other select fields, avoided the heavy losses other financial firms incurred during last fall’s financial meltdown. Thus far, the indicators reflect TIAA-CREF’s prudent, disciplined investment strategies. From Sept. 30 to Dec. 31, 2008, the height of the crisis, TIAA-CREF saw managed assets dip from $398 billion to $363 billion, an 8.8 percent decrease.
Currently, TIAA-CREF has 3.4 million clients and works with 15,000 institutions to deliver their products. Diverse recently spoke to TIAA-CREF President and CEO Roger Ferguson Jr. to discuss how the company is responding to the crisis and, more importantly, to its members, as the recession deepens and retirement plan preservation becomes the order of the day.
DI: You’ve been on the road a lot. What kinds of things are you hearing from your members, people who are participating in TIAACREF? FERGUSON: Well, what I’m hearing falls into two or three categories. First, a general desire for what I describe as a gut check. “Is it going to be OK?” The second thing we’re hearing is, “What should we be doing now? Should I change my plans?” And my advice generally is to stick with the plans you had before. And then, obviously, they’re always curious about how TIAA-CREF is doing. “How have you managed to avoid some of the pitfalls that others fell into?” That sort of [thing] really is the three categories of questions I get.
DI: So your core strategy at CREF has not changed based on this economic downturn?
FERGUSON: No, I would actually say this economic downturn has in some fundamental sense proven the value of the model, and our model has a couple of components. From the standpoint of the way we invest, we always invest with a long-term view. We invest thinking about broad diversification in our own portfolio, and that has proven to be helpful. The second way in which we invest is with a strong interaction between the asset management people and the folks who do risk management. There is a lot of tension occasionally. Obviously as you can imagine they see the world differently. But that model has proven to be true and that helps us avoid some of the problems. The other things about our model, the things our participants see have proven to be very useful: objective advice delivered often in person on 60 offices; that has proven to be a very valuable capability that we have. And reminding people they are saving to get to and through retirement, so keeping that long-term perspective. All of those bedrock truths we have been preaching and practicing for a long time, and I think, if anything, have been validated by the recent turmoil.
DI: When there were new entrants into the market a few years ago, the competition heated up and these, by and large, have gone away. What do you think accounts for that?
FERGUSON: Well, I think, as you have pointed out, there are relatively new entrants into our marketplace; they had a different view of what they were doing. Many of those who entered the marketplace were offering an asset-gathering machine, if you will, often in the form of different kinds of mutual funds. We were the only institution, TIAA-CREF, to provide a real retirement plan. I think one of the big differences this year is that if you are providing a retirement plan, you are thinking about your participants in terms of a 20-year, 30-year, 40-year, 50-year relationship, in some cases. If you’re in the asset-gathering mode, you are basically thinking about what assets can I get from the participant, this employee, today, and you are not really thinking through what is going to be good for them for the next 20, 30, 40 years. I think that’s an important distinction.
DI: We have heard quite a bit of conversation about deregulation now and the pros and cons of deregulation. When you focus just on your market, the higher education market, is there a need for a more paternalistic approach to helping higher education professionals to navigate this very complex world we live in now?
FERGUSON: I wouldn’t use the word ‘paternalistic.’ I think what people in the higher education world need is basically good, solid, objective advice, which is not paternalism, but basically working with them to understand what their risk tolerance is, what their plans and aspirations are, and then how they can achieve that. I think they need something that everybody needs, which is real diversification across many different asset classes. One of the things that we’ve learned is that if you have different strategies of equity investment, at the end of the day you still have equity. I would not say that true diversification is paternalism; I think it’s really working with the participant to help them achieve their goals in the long term.
DI: It appears as if a lot of people are going to have to postpone retiring now. How does that affect TIAA-CREF, the fact that a large number of your people are going to be postponing retirement? FERGUSON: It affects us in a couple of ways. First, we clearly have to be sympathetic to that. There are a number of people whose plans have changed dramatically, and we have to give them a sympathetic hearing and help them recognize that we understand how things have changed. Having said that, even if you are postponing retirement by two, three or four years, you are still going to be retired and living off a retirement income for 20, 25 or 30 years. So, from our standpoint, the postponing of retirement in some fundamental way doesn’t change the work that we have to do with you. Because we have to get you into a position that you can retire for a very, very long period of time. And if you postpone it, that’s a change in some ways, but it’s not a fundamental rethinking of our mission.
DI: I want to switch a little bit. Your decision to begin looking at divestiture from companies doing business with Darfur, tell me a little bit about that decision, and what does it say about TIAA-CREF.
FERGUSON: Well, it says two things. One is that it very much reflects the fact that we take our role toward socially responsible investing very seriously. We have recently announced that we are going to increase our level of engagement with these companies that do business in the Sudan, and if we don’t succeed in getting them to focus on their broader social responsibility and humanitarian issues, then we will be prepared to divest. That’s the issue that you’re talking about. And I think it’s important because it sends a message that we’re very serious about being a socially responsible investor; we are very serious about our efforts to do engagement; and it clearly signals that, at the end of the day, the option to divest is a real option, not just a paper option.
DI: How would you assess the Obama economic recovery plan? FERGUSON: I would say it’s got a real opportunity to work. There are many components to the plan. First and foremost, there is the deadline bedrock of the stimulus component, $787 billion. He has added to that a focus on mortgages, and just recently they have introduced some thoughts on how to deal with the assets on the balance sheets of banks. So it’s a three-pronged approach. Each prong is necessary and I think, at this stage, it looks to be appropriately scaled. So without endorsing each one of the details, I would say that I am broadly supportive that he is going in the right direction.
DI: What keeps you up at night? What do you worry about in this market?
FERGUSON: What really worries me most is the point I’ve just made. Are our participants, in this context of great uncertainty, having a chance to step back, take a deep breath, and avoid making rash decisions that they may well regret a year from now? So the thing that really keeps me awake at night, that worries me the most, is are we helping our participants to avoid falling into the trap of making short-term decisions that may feel good for the next day or two, but that in the next year or two will prove to be the wrong decisions?
DI: And what are you doing to allay those fears and concerns? FERGUSON: Well, we’re doing a number of things. First, we’re being very transparent. We have raised, I would argue, our level of communication to new heights. We were particularly eager to reach out to individuals in September, October, November of 2008 when things really fell apart. And we continue to do that to this day. So our main reaction has been to up our game, if you will, and to be more transparent and more proactive in communicating messages that we think are balanced and accurate and fair.
DI: Do you think that this thing is close to bottoming out or, where do you see it?
FERGUSON: I think it’s too early to say it’s close to bottoming out. As we sit here and talk, towards the end of March 2009, there are some early signs of a few markets that seem to be searching for the bottom. So we’ve seen relatively good news about housing sales, both for new homes and existing homes. The stock market itself has been up and down, but it’s been more up here of late. There is some evidence in some markets that the government plans are getting the kind of traction they want. So it is too early to declare a bottom, but perhaps we are starting to see some early glimmers of return.
DI: And finally, what is the message that you want to communicate to your members?
FERGUSON: My message to our members has three components. First, TIAA-CREF remains stable and financially sound and able to live up to our commitments. Secondly, do not make rash, short-term decisions. Think about the long term. And third, please reach out to us for objective advice, because we are here to help and we understand very much our higher education market and our obligations in that market.
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