TIAA-CREF: Moving Out of the Ivory Tower

A new boss is overhauling the pension fund giant. Will it remain a shareholder activist?

Seven top lieutenants replaced. Fully 8% of the workforce laid off. The rank-and-file told that much about their firm is about to change. And now, more job cuts in the works. Sounds like the sort of shakeup Merrill Lynch & Co. (MER ) might undertake?

Well, it's happening at Teachers Insurance & Annuity Association College Retirement Equities Fund, TIAA-CREF, the largest provider of pension plans for colleges and other nonprofits, which manages $290 billion in assets. New Chairman and Chief Executive Herbert M. Allison Jr. is putting the money-management firm through the wringer in order to turn it into a sharp-elbowed and agile financial-services outfit. And it just so happens that he worked at Merrill for 28 years, resigning as President in 1999.

Change is overdue. For decades, the nonprofit, renowned as a champion of good corporate governance, was run like one of the heavily endowed universities it serves, with effectively tenured employees and huge ivory-tower offices. As its costs rose, its rivals gnawed steadily at its market. In July, New York State dropped the firm for its college-savings plan. Fewer younger college staff members are signing up with TIAA-CREF because schools also offer Vanguard Group and Fidelity Investments as options. And even those that pick TIAA-CREF for their plan are turning to banks and others for investment advice. To top it off, the equity funds that the firm began offering in 1997 in a bid to become a major fund outfit have performed poorly.

Critics charge that Allison is on a mission to Merrillize TIAA-CREF, turning it into a typical financial firm. He dismisses the notion. "This is a different culture with a different mission; comparisons don't have much value here," he says.

What Allison is doing does have a familiar ring, however. He's streamlining reporting lines and slashing costs; never before had the firm laid off employees. And he's planning to offer more comprehensive financial advice, Merrill-style. Instead of one-size-fits-all, the firm will tailor investment advice to each market segment, from millionaires to small fry. Meantime, its mutual funds will be sold to the general public through other financial-services companies. TIAA-CREF is even considering expanding into cash-management accounts -- a banking service that Merrill pioneered in the 1970s.

Right now, the odds are on Allison to pull off his revamp. He believes he has the right strategy: boosting assets by focusing more tightly on TIAA-CREF's core market of academic and nonprofit institutions. "We know that market better than anybody," he says. He has worked hard to win over employees, answering dozens of e-mails daily through what some now call "Herb Mail." The board is behind him. "The effort of management is to make TIAA-CREF a more profitable enterprise," says former Securities & Exchange Commission Chairman Arthur Levitt, a board member.

A FINE LINE. Still, Allison is walking a fine line between expanding the business and maintaining its above-the-fray practices. Soon, he will face these issues without revered Chief Investment Officer Martin Leibowitz, who retires in February. Already there's grumbling over whether TIAA-CREF's signature efforts to improve corporate governance will fade. TIAA-CREF watchers are scrutinizing Allison's every move, from whether he'll charge marketing fees on mutual funds (his predecessor, John H. Biggs, thought them unseemly) to whether his pay package meets governance guidelines (it'll be revealed in November in the proxy statement). At the annual meeting Nov. 13, dissident members plan to press Allison to boost the commitment to shareholder activism. But Vanguard founder John C. Bogle remains a fan: "They are still the gold standard." If Allison can balance these missions, he'll put TIAA-CREF, as well as members' retirements, on a firmer footing.

By Emily Thornton in New York

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