Roger W. Ferguson, Jr.
Remarks to the Washington Higher Education Secretariat

My remarks today will cover the economic outlook as well as an update on TIAA-CREF. I hope to devote most of our time to your questions and comments.

One of my top priorities is to meet on a regular basis with our individual and institutional clients.

In recent months, I have had the opportunity to discuss firsthand the unique challenges that the economic crisis represents for the higher education community.

Most recently, I met with university presidents and other leaders at the American Council on Education annual meeting.

I spoke with chief financial officers and senior administrators at the NACUBO Endowment Forum.

This past week I spent a number of hours discussing participant concerns with consultants at our Telephone Counseling Center in Charlotte.

And I continue to receive unsolicited feedback from many friends and colleagues who are TIAA-CREF participants.

Economic Outlook

Our clients face significant and, in some instances, unprecedented challenges.

Many have had to contend with budget gaps and hiring freezes.

They face suspended pay raises and infrastructure projects.

They are contemplating layoffs and furlough programs – unpaid leaves of absence.

Endowment managers have struggled to support ongoing operations while preserving future purchasing power. That is not easy even when markets are strong.

A new survey by the Council for Aid to Education¹ shows that gifts to colleges and universities will most likely decline for the next two years. (The survey does forecast a rebound in donations by 2011.)

At the same time, institutions continue to adapt their business model to improve access, efficiency and sustainability.

In New Hampshire, Pennsylvania, and a number of other states, we see a movement toward "low-cost, no-frills" institutions that offer accelerated, year-round programs.^{2, 3}

Other institutions are offering three-year bachelor's degree programs⁴ – an option endorsed by Senator Lamar Alexander at the ACE meeting.

The trend underscores the importance of value, not lowest cost.

Graham Spanier, President of Penn State – and the recipient of the 2009 TIAA-CREF Theodore M. Hesburgh Award for Leadership Excellence – has noted that students "want longer library hours… faster broadband service, better food. And they are willing to pay for it."⁵

The economy and the higher education community endured great difficulties in 2008, and we will see equally demanding tests in 2009.

According to a report released last Friday, U.S. Gross Domestic Product (GDP) fell at an annual rate of 6.2% during the fourth quarter of 2008.

This is a revision of the 3.8% decline previously reported for the quarter.

We at TIAA-CREF estimate that U.S. GDP could decline another 3% to 4% (on an annual basis) in the first quarter of 2009. Even with considerable fiscal stimulus, the year is likely to end with an overall decline of 2% to 3% or more.⁶

Residential housing markets will continue to search for a bottom.

Credit markets will not be fully liquid.

Equity markets will remain volatile.

Unemployment, a lagging indicator, will also continue to rise through 2009 and into 2010.

As a result, investor and consumer confidence will remain at a premium.

The Consumer Confidence Index, which has been sliding since September, reached a new all-time low in February.⁷ More than 40% of those surveyed said they expect business conditions to worsen over the next six months; 47% expect fewer jobs.

While a sustained rally is unlikely in the near term, markets will eventually recover.

The fundamental underpinnings of such a recovery include:

• fully liquid credit markets,
• rising consumption,
• positive company earnings growth,
• improvements in housing starts, prices and sales, and
• renewed investor confidence.

Those are signs to watch for, patiently.

Government Efforts

Looking ahead, we know that policymakers will intensify their efforts to strengthen the economy, stabilize the financial system, and improve economic governance.

Stimulus plans already put forth by the U.S., U.K., China, Japan and other countries total more than $3 trillion worldwide.

If these plans are implemented quickly and smoothly, the outlook for a global recovery is more promising.

Even so, the process will take time.

The U.S. stimulus program, for example, consists of short-term spending increases, long-term infrastructure investments and tax cuts.

We won't begin to experience the benefits of the stimulus until later this year.

Additional stimulus measures beyond those already proposed may be needed as well.

And we have only begun to create a blueprint for regulatory reform, which is essential to restore stability, improve transparency and ensure sustainable growth.

TIAA-CREF's Advantages

Amid continued short-term uncertainty and even turmoil, the challenge for individuals and institutions will be to maintain a long-term perspective.

To that end, and on a more positive note, the economic crisis is providing an opportunity for employers, individuals and policymakers to think anew about retirement security.

It is focusing renewed attention on principles that we at TIAA-CREF have developed through 90 years of service to your institutions and employees:

• Automatic Enrollment and Savings
• Objective Investment Advice
• Options for Guaranteed Income⁸
• Savings for Health-Related Expenses
• Broad Diversification

William Greenough, who developed the variable annuity⁹ – the foundation of CREF – and who chaired our organization for many years, once said:

"We should try to design a retirement plan to work well in times of peace and war, inflation and deflation, depression and prosperity, and all of the other words used to describe the volatile nature of the American economy…"

Dr. Greenough said that in 1954.

Today, we continue to counsel our clients to take the long view – to avoid chasing after what could be short-term upticks, and to stay focused on a long-term plan that looks across market cycles to achieve a safe and secure retirement.

Performance

Thanks to TIAA-CREF's long-term investment philosophy and sober risk management, we remain financially strong and stable – a fact that is very reassuring to our clients.

According to recently released data from Morningstar, more than three-quarters (76%) of TIAA-CREF's variable annuities and mutual funds exceeded their category median over the three-year period ended December 31, 2008.

And 72% exceeded their category median over the five-year period ended December 31, 2008.¹⁰

The Morningstar data shows that TIAA-CREF's variable annuity accounts and mutual funds have performed very well relative to peers.¹¹

We have taken steps to manage our costs aggressively. And we will continue to do so, as we work to deliver a competitive expense ratio and long-term value, consistent with our mission.

We are also working to streamline our systems and processes, improve the quality and speed of our service delivery, and execute with precision – all to enhance the client experience.

We have implemented a number of service improvements and are seeing the results. We continue to maintain our transaction processing (T-processing) standard and have seen Quality Assurance (QA) metrics averaging over 99% – meaning we are delivering timely, accurate service.

Service levels in our Telephone Counseling Center are the highest we have achieved since 2003.

Our 2008 service levels were above plan (79% of calls were answered within 30 seconds vs. plan of 70%) and are 16% better than our 2003 service levels.

Our advisors held about one-third more advice sessions with participants in the last months of 2008 than in the prior-year period.

In recent months, more than 5,000 participants attended TIAA-CREF investor events in New York, Ann Arbor, Lansing, Charlottesville and other communities.

And we continue to provide information and offer assistance to our institutional and individual clients through all available channels, including electronic newsletters, emails, and regular postings on our website.

Signs of Success

I'll share just one story.

Last month, a participant transferred a significant amount of money to TIAA-CREF, citing and praising us for what he believed to be a superior combination of service and value.

It was the largest after-tax annuity sale in the company's history.

But that's not why I am telling this story.

The process went so smoothly that halfway through, we received a second transfer request.

This one was much smaller – but in many ways far more significant. This transfer request was from the client's mother.

TIAA-CREF's competitive advantages are meeting many such tests of the marketplace, proof that we are fulfilling our mission.

In Closing…

In his speech before the joint session of Congress last week, President Obama spoke of the "urgent need to expand the promise of education in America" – and announced that by 2020, the U.S. would once again have the highest proportion of college graduates in the world.

I believe that while we face great challenges in terms of the economy and higher education, our long-term prospects are bright.

We can and must "educate our way to a better economy," as Secretary of Education Arne Duncan has said.

I fully endorse that sentiment.

While it is true that TIAA-CREF exists solely to meet the financial needs of your institutions and employees, more broadly, we seek to advance the interests of the nonprofit community.

Whatever role higher education plays in the U.S. and world economy, whatever role your organizations play, I can assure you that TIAA-CREF will continue to grow in a way that is consistent with our mission, maintains our long-term perspective, and builds on our financial strength.

Which is to say… in a way that best serves you, and those you serve.

Now I look forward to your questions and comments.