A DILLAR, A DOLLAR, TIAA-CREF NOT JUST FOR SCHOLARS: PENSION POWERHOUSE GOING PUBLIC WITH MUTUAL FUNDS

TIAA-CREF, the $213 billion pension system for college and university employees, squelched any remaining doubts last week that it has ambitions far beyond the cozy world of academia.

New York-based Teachers Insurance and Annuity Association-College Retirement Equities Fund, the country’s third-largest manager of tax-exempt assets, announced that it will begin offering its new family of no-load mutual funds to the masses, refusing to limit itself to employees of colleges, universities and research institutes, a market it dominates.

Its decision could be a first step toward offering more investment products such as annuities and 401(k) plans, an $857 billion market, to the general public, a move which could shake up the industry. TIAA-CREF, which manages more pension assets than the number one fund company, Fidelity Investments, is able to negotiate low trading costs and has passed the benefit along to its customers in the form of low expenses.

Vanguard under fire?

That poses a threat to other thrifty fund providers like Vanguard Group, as well as to insurance companies offering higher- priced annuities. Of course, Vanguard and Fidelity have been competing on TIAA-CREF’s turf for about a decade since the Department of Justice loosened its hold on the 403(b) market and opened the education retirement plan arena.

TIAA-CREF is certainly late to the retail mutual fund game, considering the industry’s 10-year boom, but the timing coincides with its new profit motive. Less than a year ago, a federal law stripped the 80-year-old organization of its tax-exempt status. What’s more, TIAA-CREF is not allowed to tout its solid track record running variable annuities in marketing the new funds.

Meanwhile, competition in the variable annuity market has been brutal in recent years, and TIAA-CREF has lost market share to competitors such as Hartford Life Insurance Co. TIAA-CREF is still the dominant player in the $620 billion variable annuity business, even though its annuities are sold only as part of employe
e-sponsored retirement plans.

no more barriers

“There is nothing holding them back any more from broadening their market reach,” says Patrick Reinkemeyer, editor of Morningstar Variable Annuities/Life.

Last year, TIAA-CREF dropped the first hints that it would push beyond its core market. (InvestmentNews, Nov. 3, 1997) It began training its army of 500 registered reps to provide financial advice and set out to boost its visibility among consumers by sponsoring conferences with leading personal finance experts, among other measures.

“One of the problems we always had was that every time we wanted to do something, we had to weigh that against the possible loss of our tax exemption,” says Mike Fegan, a TIAA-CREF vice president.

Still, in the cutthroat world of for-profit money management, TIAA-CREF’s success depends on its ability to keep expenses low while spending money to break into new distribution channels and build name recognition. It has begun making overtures toward advisers, but has a long way to go.

In reaching out to advisers, many of whom already serve its investors, TIAA-CREF has begun developing systems to provide planners with duplicate statements for 403(b) accounts.

“For them to really be a player nowadays, they are going to have to make this market more user-friendly from an adviser standpoint,” says Janet Briaud. A certified financial planner, she is president of Bryan, Texas-based Briaud Financial Planning, which has about $120 million under management, mainly for educators. About $15 million of the firm’s assets under management are invested with TIAA-CREF.

Marketing campaigns can be pricey and TIAA-CREF’s investment products are pretty lean.

Total expenses for TIAA-CREF’s variable annuity, which has assets of $120 billion, are about 0.32%, compared to 2.09% for the industry, according to Morningstar.

low fund fees, too

Fees for its mutual funds are also among the lowest in the industry, ranging from 0.29% for TIAA-CREF Money Market Fund to a
rock-bottom 0.49% for TIAA-CREF International Equity Fund.

The average for all open-end funds is 1.25%, according to Lipper Analytical Services Inc. in New York.

“They can do that because they have such a large asset base. They can really bring some economies of scale to their product,” says Morningstar’s Mr. Reinkemeyer.

While its mutual funds don’t have a long track record, they are modeled after its variable annuity portfolios, which have a history of relatively strong performance.

For instance, the $100 billion TIAA-CREF stock account returned 17.64% for the five-year period ended Jan. 31, slightly beating the 16.73% return for its peers, according to Lipper.

“There are a lot of fund companies out there with great performance,” says Louis Jicha, officer, broker dealer marketing, at Nationwide Life Insurance Co. Nationwide competes in the variable annuity market and has been aggressively rolling out low-cost products. “If you expect to get your good story told,” he says, “you need some distribution.”

Officials say TIAA-CREF’s first goal in making its mutual funds available to all investors is to drum up more business among its existing clients – 2 million employees of universities and other institutions, and their family members.

Indeed, the organization wants badly to shed any perception that it is locked in an ivory tower and to position itself as a profit-minded corporation.

Says Louis Harvey, president of Boston-based Dalbar Inc., a financial services research firm: “People should shake in their boots when they see TIAA-CREF coming.”