A Letter from Scott Evans

Dear TIAA-CREF Participant:

The past year has been extremely difficult for investors in the global securities markets. Unfortunately, this means that the income from the CREF and TIAA variable annuity accounts, which are designed to rise and fall with the underlying markets in which they are invested, will decline this year because of the dramatic drop in the markets, reflecting pronounced weakness in the global economy. Last month, we provided initial notification to those who receive variable income from us that these declines were likely to occur. We are now able to be more specific, showing you the impact to your account.

Equity markets have suffered steep declines over the past year through March 2009, which coincides with the annual revaluation of CREF stock accounts.  Returns from commercial real estate markets have also fallen, impacting the return from the TIAA Real Estate Account. The income decline for annuitants of the CREF bond accounts is less severe. All annuitants receiving income from the CREF equity accounts or the TIAA Real Estate account will see reductions beginning May 1. The specific changes for each account are described in this issue of Outreach and the effect on your own income is detailed in the individual statements that accompany this letter.

Although it is small solace in light of such dreary news, we feel that it is important to note that the returns of our funds have been strong relative to those of our competitors. Over the three-year period ending December 31, 2008, 76% of TIAA-CREF's Morningstar-rated mutual funds and variable annuity accounts have outperformed their Morningstar category median, well ahead of a number of other financial companies. The Morningstar median represents the midpoint of an index of comparable funds/accounts grouped by factors such as investment objective and asset class. To us, this helps to validate our investment philosophy which is geared to producing steady growth over time, rather than aiming to dazzle with short bursts of headline-worthy results.

The current recession is far more severe than what would result from normal cycles and reflects the need for fundamental changes in how the government regulates and manages the economy.  Our Chief Investment Strategist Brett Hammond cites three causes of the current recession:

• The rapid growth of the global financial system over the past 15 years outpaced the government's ability to regulate the changing environment.
  
• The risks of the evolving financial environment, and of new investment tools like mortgage-backed securities, were not fully understood or addressed.
  
• Cheap, short-term interest rates early in this decade encouraged banks and individuals to borrow freely. This drove up home prices, increased consumption, loosened lending and increased the likelihood of firms investing in more risky assets.

The initial effect of these three factors was low unemployment and economic growth, but it led to a housing market bubble.  In response, the government began raising interest rates, which squeezed the profits on home loans and mortgage-backed securities. As a result, housing prices and sales fell and residential loan markets experienced rising default and foreclosure rates. The effects spread from home loans to all credit markets, which then seized up. The resulting impact on the equity and bond markets led to the market declines which underlie the reduction in your variable annuity income in the year beginning May 1 , 2009.

The good news is that TIAA-CREF's pension system is working as it was designed. To balance the volatility of income from variable accounts, we have a guaranteed account,   TIAA Traditional, which provides a base of income even during turbulent times. The guarantee is just that  – a guarantee for all existing funds and new money paid into those contracts. 

We announced in December that lifetime income from the TIAA Traditional Annuity will remain steady for all of 2009, and in some cases increase slightly. This highlights the importance of diversification in your portfolio².

The enclosed Outreach newsletter describes more fully some of your options and illustrates how some different allocations would have fared over the years. You can also call us at 1 800 842-2776 to discuss potential steps you can take to mitigate the loss in annuity income.

Sincerely,

Scott C. Evans
Executive Vice President, TIAA-CREF Asset Management
President & CEO, TIAA-CREF Investment Management, LLC and Teachers Advisors, Inc.