The Chronicle: 11/5/2004: A Pension Giant's Extreme Makeover

Herbert M. Allison Jr., chief executive of TIAA-CREF, could not lose sight of the competition if he tried. A glance out the windows of the company's 26th-floor executive offices in midtown Manhattan reveals a new addition to the neighborhood: the Fidelity investor center across Third Avenue. It is Mr. Allison's daily reminder that his company's days of dominance -- when the 86-year-old Teachers Insurance and Annuity Association-College Retirement Equities Fund monopolized the higher-education pension market -- are long past.

TIAA-CREF is still No. 1 in academe, but college employees now have a plethora of choices for stowing their retirement dollars.

Mr. Allison, who took over the company in late 2002, believes that TIAA-CREF must change the way it does business to remain relevant. Vendors like Fidelity Investments, Vanguard Group, and the Valic unit of American International Group Inc. have been encroaching on its territory for more than a decade, eroding TIAA-CREF's share of new investors, and dropping what used to be its 100-percent market share to some 70 percent.

Even before Mr. Allison arrived, the company had started expanding its offerings. Now TIAA-CREF is not just a pension company but also a financial-services provider, offering life insurance, 529 college-savings plans, retail mutual funds, IRA's, after-tax annuities, and Keough retirement-saving plans.

"We had taken steps in the last six or seven years to broaden our product line," says Mr. Allison. "But we saw that we had to do more."

For Mr. Allison, more means more of everything -- more customer service, more offices closer to more campuses, and much more marketing. In fact, the centerpiece of his plan has been the most aggressive marketing blitz the staid company has ever mounted.

The company has continued with its conservative but reliable investment strategies. All the other changes, however, have also meant layoffs, the replacement of top executives, and some more scrutiny from its traditionally skeptical and outspoken customer base.

Some TIAA customers have wondered if the company is abandoning its modest demeanor. Mr. Allison arrived after almost 30 years in top jobs at Merrill Lynch & Company, and his $8-million pay package is $2.2-million more than what his predecessor earned in his last full year. And the tens of millions of dollars being spent on advertising has raised a few eyebrows.

"They say they need to increase the size of their market share, but they're already one of the biggest players," says John D. Hoge, a 57-year-old associate professor of education at the University of Georgia and a TIAA-CREF participant since 1978. "At $300-billion they have plenty of leverage in the market, and they don't need more."

Change of Strategy

Mr. Allison inherited a company with many strengths. TIAA-CREF manages $320-billion in assets and has always been known for its low costs.

"I came here very excited about the possibilities," says Mr. Allison, 62. "This company is owned by its participants. It had no conflicts of interests. Our people are not paid on commissions. It seemed to me we had the potential to provide even better service to those we are mandated to serve."

He spent half of 2003 conducting a full-scale review of TIAA-CREF's operations. That entailed customer focus groups, demographic studies, and employee workshops and confidential surveys of employees.

On the basis of that research, TIAA-CREF decided to refocus the business on its core customers in higher education, research and cultural institutions, and nonprofit hospitals.

A revamping of the corporate structure so that employees are organized by customer market segments instead of product lines has resulted in the first layoffs in company history.

Two major goals -- increasing the percentage of employees interacting with customers to 50 percent from 25 percent, and reducing the $1.5-billion operating budget by $300-million by 2005 -- meant that about 500 of the organization's 6,500 people had to be let go.

Cutting expenses was necessary if TIAA-CREF was to remain a low-cost company, its leaders say. TIAA-CREF's head count had swelled by 26 percent from 1998 to 2002. As a result its expense ratio -- the amount that participants pay annually for operating expenses and management fees -- had climbed 40 percent in the same period.

Not all the savings were in personnel. For example, TIAA-CREF consolidated an information-technology system to save money and improve customer service.

Last year the company opened its first "storefronts," offices located on or near college campuses.

But perhaps the most visible change has been a television, radio, and print advertising campaign designed to lift the company's profile -- another first for TIAA-CREF.

Hip to Be Square

One Monday morning in early October, I. Steven Goldstein, executive vice president for public affairs, settles into a wing chair in the corner of his office, facing a muted television tuned to CNN. When he arrived 18 months ago, TIAA-CREF was ending a modest marketing campaign that had quietly persisted for years.

The company had worked with Ogilvy, a New York-based marketing company with which TIAA-CREF had a longstanding relationship. The campaign's slogan was "Managing money for people who have other things to think about."

"We weren't marketing very effectively," Mr. Goldstein says. "I'm afraid that if we had been selling toothpaste, we wouldn't have been in business."

TIAA-CREF had never placed much emphasis on marketing, beyond sponsoring campus events and National Public Radio spots. Meanwhile, the customer base was changing, other vendors were moving in, and new employees at colleges and universities were no longer choosing TIAA-CREF during enrollment periods.

Research commissioned by the company showed that less than 1 percent of the American public even recognized TIAA-CREF's name. "And that was within the poll's margin of error," notes Mr. Allison.

But the same research also revealed that existing customers had unparalleled loyalty to TIAA-CREF. They were drawn to the company primarily because it doesn't pay sales commissions and it is a nonprofit organization, the surveys showed.

"We learned that people who know us and have us, love us," says Jamie DePeau, TIAA-CREF's vice president for marketing. "They talk about being part of a community. The issue that we had was that the community was relatively small."

The company parted ways with Ogilvy and hired Modernista, a small Boston-based agency known primarily for its work with Converse sneakers, Hummer vehicles, and MTV.

And then the skepticism grew.

"I took a little bit of heat for the first couple of months, both internally and externally," Mr. Goldstein says. "People wondered what was going to be next. You're going to be advertising on MTV? The proud sponsor of Road Rules?"

Olympic-Size Launch

What the new marketing team had in mind to kick off its series of commercials wasn't exactly geared toward the MTV crowd. TIAA-CREF hired an agency called TargetCast to plan its buys -- where the radio, television, and print ads would be placed for maximum effect.

Considering that in the fall the airwaves would be cluttered with election advertising, the team looked to an earlier event: the Olympics. It placed the first 60-second spot in the first 15 minutes of the opening ceremonies of the games, in August.

"We felt the Olympics was the right venue to launch because it draws an even male and female split, it has a highly educated audience, it is a very patriotic, American event," says Mr. Goldstein. "We felt it could reach the target that ultimately we wanted to reach."

The commercials, which have continued, highlight TIAA-CREF's squeaky-clean image in the wake of Wall Street scandals with a new tag line, "For the Greater Good," which doubles as a warm and fuzzy affirmation of its customers' public-service careers.

"There's a Place for Us," from West Side Story, is heard as images of professors or janitors or doctors at work roll past. The 60-second spot was broadcast nationally and in 22 local markets during the ceremonies, along with 30-second cuts that ran throughout the games and will continue nationally and on cable television at least through the end of the year.

A simultaneous print campaign started during the Olympics, with full-page ads running in The Wall Street Journal, Newsweek, The New Yorker, Business Week, Fortune, and 24 major newspapers. (Ads also ran in The Chronicle.)

Ms. DePeau says the wave of advertising -- which also includes spots during such television shows as CSI, The Daily Show With Jon Stewart, and sporting events; and in Vanity Fair and Parenting magazines -- is meant to shore up the customer base and introduce the company to potential customers, eventually getting the word out that anybody can invest in its products.

"This is to get the name, pronounce it correctly, understand that it's a financial-services company, understand who the market is that it supports," she says. "Then you'll see a broader approach around what we actually do and how we do it."

Spinning the Story

Is such a large-scale advertising campaign a good use of TIAA-CREF customers' money?

Jeffrey Sun, a 33-year-old assistant professor of educational leadership and affiliate professor of law at the University of North Dakota, has invested with TIAA-CREF since he started his career in 2000. He was given four vendor choices but says he chose TIAA-CREF because he knew it would most likely be offered anywhere he ended up working.

Mr. Sun supports the company's new marketing strategy. "I think that the effort is going to help TIAA-CREF remain financially stable," he says, "and it also helps them remain focused on the market they serve. I don't want to see them lose their competitive edge, because if they do I'm afraid it would force them to refocus on other markets outside of nonprofits."

Company executives, who note they have heard from fewer than a dozen unhappy customers, say that if the company's market share continues to decline, assets will decrease and returns will diminish.

"Society has changed, and people don't enter the academic world the way that they did 30 years ago, when it was a lifetime profession," Mr. Goldstein says. "It's very common now ... to move on to another job in the private sector or public sector. If they're recruiting from Coca-Cola to Vanderbilt, they've no more heard of TIAA-CREF than they'd want to acknowledge Pepsi."

As for cost, TIAA-CREF says only that its marketing expenses, including the advertising campaign, new sponsorships, and direct marketing, are "in excess of $25-million." According to an NBC source, the 60-second Olympics spot alone cost an estimated $700,000, and it has been reported that the advertising campaign will cost $40-million. TIAA-CREF officials will not confirm that figure.

"We spend a fraction of what our competitors spend," says Stephanie Cohen Glass, director of corporate communications. "We're being smarter with what we're spending, so it may appear that we're spending more. But it's only slightly more than what it's been in the past."

Robert Markey, a partner in Bain & Company, a New York-based marketing agency, doesn't know how much TIAA-CREF is spending, but says, "I would guess they're spending quite a lot compared to what others like them would spend."

"It's quite unusual for a company with this kind of profile to do a broad-scale campaign and to spend as much as it appears it is spending," he adds. By comparison, he says, Bain has put together $20-million campaigns that have lasted up to six months, with "modest use of television, radio, and print advertising."

A typical strategy for an organization like TIAA-CREF, with such a defined customer base, would include putting resources into buying contact lists from organizations that potential customers join, and using direct mail to reach them, he says.

"If I am a customer, I'd be fine with what they're doing if I can be convinced that it's highly effective," he says. "If it works, it's making the company and the customers' investments more secure. But I'd want to look for verification that the advertising was paying off."

Another major marketing effort that began this year is the sponsorship of a developmental cycling team, which has been racing through college towns across the country. The team comprises young cyclists preparing for the professional circuit.

As part of the tour, TIAA-CREF has invited local customers and VIP's to hospitality tents and cocktail parties. But there are a few who don't appreciate the free food and drinks.

Mr. Hoge, the Georgia professor, staged a one-man protest near the TIAA-CREF-sponsored tent when the cycling team arrived in Athens, Ga., carrying a sign and asking passers-by to sign his petition to stop TIAA-CREF from continuing the sponsorship.

"What does this have to do with my retirement fund?" he says. "My retirement funds are feeding free lunch to people."

Even Split

With colleges and universities ending their pension-plan enrollment periods this month, it may be too soon to tell if the ad campaign is helping TIAA-CREF's cause. But college human-resources directors say the choices of new employees over the last few years have reflected the company's decreasing market share.

At Rollins College, 660 employees can choose between TIAA-CREF and Fidelity. Until the mid-1990s, TIAA-CREF was the only investment option, but now employees are split almost evenly between the two, says Maria Martinez, assistant vice president for human resources and risk management.

"If somebody comes from another institution of higher learning, they're more likely to already have money with TIAA-CREF," she says. "But the people who come from the corporate world gravitate to Fidelity because they don't know TIAA-CREF."

As for young people making their first retirement-benefit decisions -- a group that TIAA-CREF is equally eager to reach -- Marcia Chatalas, director of human resources at the University of Arizona, sees them making decisions based on advice they hear from others.

So far in 2004, Ms. Chatalas says, TIAA-CREF has scheduled 50 meetings on the Arizona campus to counsel its customers. "This volume of meetings exceeds those scheduled by our other vendors," she says. In the most recent enrollment period, about 55 percent of eligible employees at Arizona chose TIAA-CREF as their retirement benefit provider over Fidelity, Valic, and Vanguard.

When new employees go to information sessions on retirement benefits, vendors have about five minutes to make an impression. So TIAA-CREF is also trying to make its printed information more user-friendly. And it plans to open 15 to 20 more offices during the next year. The company's goal is to ensure that three-quarters of TIAA-CREF customers are within 30 minutes of an office, where they can get the advice they need.

The idea is to make TIAA-CREF a familiar presence. "They see the ads, they have the materials that are easy to understand, they have a storefront they can go to, they go to an art show on campus or a basketball game, and we're there with a sponsorship," Ms. DePeau says. "It's 360 degrees."

TIAA-CREF leaders insist, meanwhile, that they are not losing touch with longtime customers. Any change in strategy must first strengthen their loyalty and encourage them to view the company as a financial-services provider, not merely a retirement fund, Mr. Goldstein says.

"Fundamentally there's a core group of people out there who love TIAA-CREF," he says, "and we don't want to do anything to harm that."

The company's commitment to reaching out to customers old and new will continue into at least 2005 and most likely beyond, executives say, or at least until new market research indicates that a critical mass of people has finally come to know TIAA-CREF's name.

Back in his office, Mr. Goldstein's attention momentarily turns toward the television. A TIAA-CREF commercial appears on the screen, as if on cue.

"That wasn't timed," he says with a laugh.

HOW TIAA-CREF FUNDS PERFORM

The assets under management by TIAA-CREF have grown in recent years, but the funds have a mixed performance record in comparison with the benchmarks that the company uses.

Assets under management, 2003

Fidelity Management & Research Company

$840-billion

Vanguard Group

$690-billion

TIAA-CREF

$307-billion

Total return for periods ending September 30, 2004

Funds managed by TIAA (benchmark funds are in italics)

10 years

Money Market Account

1.2%

2.9%

4.1%

iMoneyNet

1.0%

2.6%

3.8%

Bond Account

5.7%

7.4%

Lehman Aggregate

5.9%

7.5%

7.7%

Inflation-Linked Bond Account

9.3%

9.9%

7.7%

SSB Infl. Linked Securities

9.8%

10.3%

8.1%

Real Estate Account (no benchmark)

6.9%

7.8%

8.1%

Funds managed by CREF

10 years

Stock Account

5.6%

-0.7%

9.3%

CREF Composite Index

6.2%

-0.1%

10.0%

Growth Account

0.2%

-8.2%

7.3%

Russell 1000 Growth

1.7%

-8.6%

8.2%

Equity Index Account

4.9%

-0.4%

10.6%

Russell 3000 Index

5.3%

-0.1%

10.9%

Global Account

5.2%

-2.0%

6.6%

Morgan Stanley World Index

6.0%

-1.6%

6.8%

Social Choice Account

5.6%

2.8%

10.0%

Russell 3000/Lehman Composite

5.1%

2.7%

9.9%

Institutional Growth & Income Fund

2.2%

-2.1%

-3.3%

S&P 500 Index

4.0%

-1.3%

-2.5%

Institutional Int'l Equity Fund

9.9%

1.2%

2.6%

Morgan Stanley EAFE Index

9.2%

-0.8%

0.1%

SOURCES: TIAA-CREF; The SNL DataSource