Roger Ferguson, J.D., Ph.D., is president and chief executive officer of TIAA, the retirement financial services giant with nearly $900 billion in assets. It was founded in 1918 by the Carnegie Foundation for the Advancement of Teaching. Among other positions prior to joining TIAA in 2008, Ferguson served as vice chairman of the Board of Governors of the Federal Reserve System, and as chairman of Swiss Re America Holding Corporation. He recently shared his insights on retirement plan issues with EBN.
EBN: The low interest rate environment since the 2008 financial crisis seems to be the new normal, and traditional assumptions about long-term rates of return on investment portfolios are being trimmed by many market analysts. This adds urgency to the need for most employees to save and invest aggressively. What role can plan sponsors play in making this happen?
Ferguson: First and foremost, sponsors are responsible for plan design. Plans should feature auto-enrollment and auto-escalation features, and a reasonable match. Secondly, plan sponsors can make available good advice, offering and encouraging participants to take one-on-one advice sessions. Research shows that individuals want a personal touch when it comes to advice on retirement. And it should be objective.
EBN: What about the investment choices?
Ferguson: Too many choices often will cause employees just to freeze. Still, you still need a range including, where possible, certain alternative investments including asset classes that may do reasonably well in a low interest rate environment, including real estate.
EBN: How to participants get exposure to real estate?
Ferguson: Today you cannot have an illiquid investment like real estate as part of a defined contribution plan default investment, although we are discussing that possibility with the Department of Labor. But we have a real estate separate account available on many of the platforms that we support; many of our plan sponsors have chosen that. We spend time educating people on real estate as a diversifying alternative asset class.
Also, the general account that supports our TIAA traditional annuity has a range of asset classes imbedded in it, including real estate, agriculture, and timber. So all of our annuitants have indirect exposure to these alternative asset classes that have been a very solid contributor to the overall performance.
EBN: Have you increased your alternatives allocation in recent years?
Ferguson: Yes. For example, TIAA is now one of the largest agricultural investors in the world. We have a very large exposure to timber as well, and have increased it.
EBN: TIAA since its founding has been big on annuities. Tell me about that.
Ferguson: Yes, we survey our retirees, and we have found that 92% are satisfied with the major decision that they made to annuitize. There is no buyers’ remorse when it came to the major source of their retirement income, which is an annuity. Longevity is both a risk and an opportunity. It’s a risk in that many Americans may outlive their savings, especially if they don’t have an annuity option. But longevity also gives many people a chance to work longer, too, if they need to.
EBN: How do you introduce the concept of an annuity?
Ferguson: We remind folks that they have insurance on their houses, on their cars, and on their lives, for protection if they die young. But we say their protection needs to be balanced, so that they can handle having an unusually long life. That’s where the annuity can help.
EBN: Is an annuity a total solution?
Ferguson: No. We never say that one should annuitize everything; that is not necessarily the right thing for most people. So our model gives people an opportunity to annuitize a part of their retirement savings, and hold some for themselves in other ways. We also encourage people to think about annuitization in two different ways: First, a fixed annuity for the more predictable expenses in life like rent, food, utilities, taxes, etc. Then, a variable annuity that, by definition, will have variable payouts. Those can fund things that are more optional, like a special vacation when the annuity’s performance is going well.
EBN: Does TIAA serve the nonprofit world exclusively?
Ferguson: We have a small number of public-sector clients that also have an opportunity to save if their plan sponsors have put the TIAA traditional option onto the platform.
EBN: What about for-profit organizations?
Ferguson: Many of our products are available in the for-profit world. They’re available in the form of our mutual funds that can certainly be put onto other platforms. We have the after-tax annuity capability as well and so folks in the for-profit world can have access to that.
EBN: TIAA has won the Thomson Reuters Lipper Award for Overall Best Large Fund Company for four years in a row. What goes into that award?
Ferguson: We compete with 37 other mutual fund groups for the award. The calculation is fairly technical, but as I understand it it’s for the best average decile ranking for consistent performance over a three-year period on a risk-adjusted basis. So it’s based on a relatively long period. And because they’re using a risk-adjusted performance calculation, you’re not rewarded just for taking risks; you’ve got manage the risk versus the return profiles. Finally, it encompasses all asset classes, so it covers the whole fund family.
EBN: Do your asset managers try to minimize volatility of returns because individual investors tend to panic easily?
Ferguson: Managing through choppy markets is one of the things that we’re supposed to do and, yes, you do want to think about both the risk and reward over time. For sure, one of the goals is to keep our participants and others who invest in our mutual funds reassured. This is the bread and butter of TIAA, thinking about good, risk-adjusted performance over time, as opposed to chasing the latest investment fad.
EBN: Do you hire outside asset mangers?
Ferguson: No, the portfolio managers are employees here, with the exception of our private equity portfolio. Everything else, including real estate, timber, agriculture, infrastructure, etc. is done by our in-house portfolio managers.
EBN: How does being chartered to serve the nonprofit world shape TIAA’s operating philosophy?
Ferguson: In several ways. First, we ourselves are not a publicly traded for-profit company. That means we do not have to worry about earnings-per-share growth every quarter. The economics of this place all go back to support the annuitants. Our staff and the people who provide advice are not incented or commissioned to sell our products.
Many of our customers are in the higher education sector, and have a tendency to move around within the sector. You become an assistant professor one place, then you might get tenure someplace else, but our products are completely portable within the sector.
Finally, because we are a not-for-profit organization, we keep our fees relatively low. The vast majority of our mutual funds have an expense ratio that’s one half the industry average.
EBN: Having been a member of the Fed board of governors, maybe you could offer some insight about how the architects of our monetary policy think about the impact of low interest rates on retirees who need income from bonds to live on?
Ferguson: The Fed has a dual mandate: The so-called maximum sustainable employment, and keeping inflation low and stable. That’s currently defined as around 2%. Achieving those two goals, particularly the inflation goal, has a big positive impact on retirees because they are very vulnerable when inflation rates are high.
But that’s also a reason why retirement investors need to maintain a level of equity exposure, which can provide protection in an inflationary environment. In fact the glide paths on our target-date funds tend to have a bit more equity than others, because we are talking about getting people safely through retirement.
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