State Universities Retirement System of Illinois

Transcription

1 State Universities Retirement System of Illinois Serving Illinois Community Colleges and Universities 1901 Fox Drive Champaign, IL (217) (217) (FAX) To: Investment Committee From: Lou Ann Fillingham, CPA Date: April 10, 2015 Re: TIAA-CREF Self-Managed Plan (SMP) Annual Review Investment Department Overview Teachers Insurance and Annuity Association College Retirement Equities Fund (TIAA-CREF) has served as a Self-Managed Plan (SMP) provider since inception of the Plan in April At December 31, 2014, more than 9,100 of the 19,195 participants currently in the SMP held assets in TIAA-CREF investment options. The provider manages approximately $640 million, or 40.8%, of the SMP assets in 12 TIAA-CREF investment offerings as listed below by option. Inception Date in Value as of % of TIAA-CREF Investment Options the SMP December 31, 2014 Assets TIAA Traditional Annuity April 1998 $90,127, % CREF Money Market Account April ,050, % CREF Inflation-Linked Bond Account July ,724, % CREF Bond Market Account April ,268, % CREF Social Choice Account April ,147, % CREF Stock Account April ,800, % CREF Growth Account * April 1998 * 370, % CREF Equity Index Account April ,829, % CREF Global Equities Account April ,116, % TIAA-CREF Large-Cap Growth Index Fund Instl Cl May ,394, % TIAA Real Estate Account August ,433, % TIAA-CREF Lifecycle Fund 2010 Institutional Cl September , % TIAA-CREF Lifecycle Fund 2015 Institutional Cl September ,583, % TIAA-CREF Lifecycle Fund 2020 Institutional Cl September ,544, % TIAA-CREF Lifecycle Fund 2025 Institutional Cl September ,424, % TIAA-CREF Lifecycle Fund 2030 Institutional Cl September ,727, % TIAA-CREF Lifecycle Fund 2035 Institutional Cl September ,347, % TIAA-CREF Lifecycle Fund 2040 Institutional Cl September ,810, % TIAA-CREF Lifecycle Fund 2045 Institutional Cl August ,723, % TIAA-CREF Lifecycle Fund 2050 Institutional Cl August ,253, % TIAA-CREF Lifecycle Fund 2055 Institutional Cl November , % TIAA-CREF Lifecycle Retirement Inc Fund - Instl Cl August , % TIAA-CREF Total $639,820, % * Terminated May 2004

2 Organizational Review The Carnegie Foundation and the Carnegie Corporation of New York founded Teachers Insurance and Annuity Association (TIAA) in 1918 to provide a system of annuities and life insurance to support the financial well-being of college teachers. The College Retirement Equities Fund (CREF) was founded in 1952 in New York as a companion organization to provide retirement annuities based on investment in common stock. CREF registered with the Securities and Exchange Commission (SEC) in the 1980 s as an investment company under the Investment Company Act of As of October 1, 2014, TIAA-CREF completed the acquisition of Nuveen Investments, a diversified investment management company. Nuveen s leadership and investment teams remain intact, and the firm operates as a separate subsidiary within TIAA-CREF, retaining its brand and multi-boutique operating model. Revenue from Nuveen that flows into the TIAA General Account helps support the crediting rate of the TIAA Traditional Annuity. TIAA and CREF are governed by separate boards of annually-elected trustees. The TIAA Board of Overseers elects the TIAA Board of Trustees members and holds the non-profit stock ownership of TIAA. In contrast, the CREF Board of Overseers has a legal function similar to that of shareholders and holds the non-profit stock ownership of CREF. Since CREF is a management investment company registered with the SEC, CREF participants elect the CREF Board of Trustee members. Mr. Roger W. Ferguson, Jr., became President and CEO of TIAA- CREF in April 2008 and continues to serve in this role. TIAA-CREF has a long history in corporate governance; was one of the first institutional investors to engage with companies on environmental, social and governance (ESG) issues; and became a signatory to the United Nations-supported Principles for Responsible Investment in March TIAA-CREF is headquartered in New York, New York and has approximately 10,500 employees nationwide. The organization maintains major investment centers in New York, New York and San Francisco, California. Major operations centers, serving as call centers and providing premium administration and benefit payment services, operate in Charlotte, North Carolina, and Denver, Colorado, with a third phone center located in Dallas, Texas. Administration and recordkeeping services for SURS SMP are provided by the Denver operations center. TIAA-CREF has 111 local offices throughout the United States providing counseling, education and advice services to plan administrators and participants. The Chicago TIAA-CREF office, staffed with 92 employees, provides counseling services for SURS SMP. Article VII of the plan document for the Self-Managed Plan stipulates that, The purchase of annuity contracts shall be made from one or more insurance companies approved by the System for such purpose. Teachers Insurance and Annuity Association (TIAA) is among the highest rated insurance companies in the United States according to the leading rating agencies: Standard & Poor s (AA+), Moody's Investors Service (Aa1), A.M. Best Company (A++) and Fitch Ratings (AAA). These ratings provide an independent assessment of the stability, claims-paying ability and financial strength of TIAA.

3 Clients/Assets TIAA and CREF had total retirement plan assets under management of approximately $430 billion and total combined assets under management, including all non-pension assets, of $851 billion at December 31, TIAA-CREF is a leading private provider of retirement benefits nationwide, serving 4 million active and retired participants from 17,000 plan sponsor clients in the government, not-for-profit, K-12 and higher education, research, and health care markets. In 2014, TIAA-CREF gained 48 plans and lost 17 client plans. Gains were the result of plans selecting TIAA-CREF as a sole recordkeeper or as a vendor in a multi-vendor environment. Client losses resulted from mergers, acquisitions or a competitive bid process. SURS Client Service Team The following TIAA-CREF Institutional Relationship professionals serve as SURS client service team: Director, Relationship Management Antoinette (Toni) Block Chicago Senior Relationship Manager Elena Zanussi Chicago Relationship Manager Matthew VanMoorleghem Chicago Client Service Consultant Russell Dockett Denver Communications Consultant Paula Smith Cincinnati Ms. Elena Zanussi became the senior relationship manager for SURS account in 2014, replacing Ms. Eileen Finnegan. The following TIAA-CREF professionals provide individual counseling sessions and financial and retirement education seminars to SURS SMP participants: Senior Financial Consultant Patrick (P.J.) Conlon Chicago Senior Financial Consultant Patrick Windle Chicago Senior Financial Consultant Christopher Stephens Chicago Financial Consultant Amy Podzius Chicago Associate Financial Consultant Ken Wolinski Chicago Director, Wealth Management Chris Yoss Chicago In March 2014, SURS staff met with members of the TIAA-CREF client service and portfolio management teams during an on-site due diligence visit at the TIAA-CREF offices in Chicago, Illinois. TIAA-CREF has been responsive to SURS requests over the past year. Cost SURS incurs no administrative fee for participants who invest in SMP offerings available through TIAA-CREF. A fee, known as an expense ratio and comprised of both administrative and investment expenses, is assessed to each SMP participant for every account in which the participant is invested. TIAA-CREF maintains a low-cost fee structure to potentially enhance the long-term performance of its investment options and participant net investment returns. TIAA-CREF continues to pursue technological operating efficiencies in the organization s website in an effort to maintain low costs.

4 The following table compares TIAA-CREF expense ratios to the median fees of the lowest fee institutional share class of Morningstar mutual fund peer groups. The weighted average expense ratio of each fund category is based on the total asset allocation of SMP assets invested in TIAA- CREF options. The 2014 weighted average median fee for Morningstar mutual funds was 0.64%, as compared to the 2013 weighted average median fee of 0.67%. The 2014 weighted average expense ratio for SMP options offered by TIAA-CREF, excluding the Traditional Annuity product, was 0.33%, a decrease from 0.41% for As indicated by the table, TIAA- CREF expense ratios are below the average in eight of the eleven categories presented, when the target date fund series is counted as one category. The fee review indicates the investment option choices available to SMP participants from TIAA-CREF are offered at a cost below the institutional mutual fund median fee, allowing participants access to investment options at a favorable, competitive cost. TIAA-CREF and NEPC professionals and SURS staff conducted a review of fees that was presented to SURS Board of Trustees in September This project resulted in TIAA-CREF offering a revised fee structure with the expectation of a 36% fee reduction savings. The new fee structure provides for an annual fixed dollar fee of $79 per participant and the creation of a revenue credit account to be used for the exclusive benefit of plan participants, retroactively effective July 1, Investment Cost Comparison with 2014 Market Averages Mutual SURS Fee Type of Fund Fund (1) TIAA-CREF Differences Annuity * Money Market Intermediate Term Bond Index - Intermediate Term Bond 0.14 N/A N/A Inflation Protected Bond Balanced - Moderate Balanced - Aggressive 0.96 N/A N/A Target Date Fund N/A N/A Target Date Fund Target Date Fund Target Date Fund Target Date Fund Target Date Fund Target Date Fund Target Date Fund Target Date Fund Target Date Fund Target Date Fund Target Date Fund Retirement Income Large Value 0.79 N/A N/A Large Blend Index - Large Cap Blend Large Growth Index - Large Growth Mid Blend 0.95 N/A N/A Index - Mid Cap Blend 0.21 N/A N/A Small Growth 1.06 N/A N/A Foreign Large Blend 0.95 N/A N/A Index - Foreign Large Blend 0.24 N/A N/A Global Equity (World Stock) Real Estate / REIT Weighted Average Expense Ratio (1) Morningstar exp data was used to calculate institutional mutual fund median fees. * Annuity products do not have a stated expense ratio.

5 Annuity Provider SMP participants may elect to receive monthly fixed annuity or variable annuity payments from TIAA-CREF at retirement. The annuity rates available from TIAA are competitive and comparable to rates offered by Principal Financial Group, the other SMP annuity provider. Initiatives/Issues/Concerns SMP Provider Search At the September 2014 Investment Committee meeting, the Board approved a provider search to be conducted in NEPC and SURS staff worked collaboratively to prepare the Request for Proposal (RFP) for distribution in early May. Responses will be reviewed and on-site visits will be conducted in the summer. Finalist presentations are planned for the September 2015 Investment Committee meeting at which time approval of one or more SMP provider will be recommended. Investment Options Consideration SURS staff routinely monitors the menu of SMP investment offerings to assure the array of approved options complies with the objectives of the SMP Investment Policy. SURS staff, with assistance from TIAA-CREF and Fidelity professionals, researches available options based on performance, risk, cost, and asset class diversification. Results from the reviews provide insight into the suitability of investment options currently approved for the SMP as well as other options that may further enhance the diversification of offerings. The SMP provider search process will incorporate a review of the SMP investment option menu. Any revision to the offerings will be included as a component of the SMP provider recommendation. Investment Option Items of Note The detailed investment option reviews included as a component of the TIAA-CREF Annual Review identify specific items of note, as follows. CREF Money Market Account: A portion of the distribution and/or administrative expenses have been waived on an on-going basis since July Any expenses waived after October 1, 2010 are subject to possible recovery by TIAA from the Account for three years after the waiver. Any recovery of fees would reduce, but not eliminate, the yield of the Account over the period in which waived fees are recovered. Enhanced Communication and Education TIAA-CREF initiated targeted communication materials based on demographics in the fourth quarter of 2014, utilizing letters, postcards, and other technology advancements. The materials focus on asset allocation, investments diversification and distribution options. TIAA- CREF maintains a schedule to identify distinct topics to be addressed through communications at specific points in the calendar year. A special mailer was sent to SMP participants invested or allocated entirely to the CREF Money Market Account. Additional outreach efforts are planned to encourage participants to utilize multiple investment options available in the SMP.

6 Choice Election Process A project to implement an electronic process allowing members who select the SMP to choose their investment option allocations via TIAA-CREF was initiated in the fall of 2014 with completion anticipated to occur in the second quarter of calendar year TIAA-CREF will provide additional information regarding available options to members who default to an ageappropriate Lifecycle Fund in lieu of actively selecting investment options. SPARK Electronic File Format Process improvements are being developed to streamline the flow of information between SURS and TIAA-CREF by incorporating the SPARK industry-standard file format for electronic submission of information. The adoption of this technology was an important consideration in TIAA-CREF s proposal to offer a lower fee structure for the SMP. Collaboration on the project began in October 2014 with migration to the SPARK layout expected to occur in the second quarter of Operational Process Issues TIAA-CREF responds timely to SURS requests in administrative and operational areas. SURS staff and TIAA-CREF professionals jointly continue to explore solutions to specific challenges in various asset distribution processes. SURS documentation of non-compliance issues has furthered the resolution of issues as they arise. Consultant Comments Background TIAA-CREF is a leading provider of lifetime retirement income to those who work in the academic, research, medical & cultural fields. The firm was established in 1918 and currently has over 10,000 employees spread across 144 offices worldwide. Investment professional turnover is limited and the firm prides itself on a non-hierarchical structure. TIAA-CREF has approximately $430 billion in assets under management across over 24,000 retirement plans and 4 million participants as of December 31, Total assets under management, including all non-pension assets were $851 billion as of December 31, Organization and Investment Review TIAA-CREF acquired Nuveen Investments on Oct. 1, Nuveen is a diversified investment management company with over $221 billion in assets under management. Nuveen will operate as a separate subsidiary within TIAA-CREF s Asset Management business, retaining its prior business model. NEPC does not expect the acquisition of Nuveen to have a material impact on the management of any of the TIAA-CREF strategies held within the Self-Managed Plan. The management teams across the various TIAA-CREF strategies experienced no major changes in The investment processes also remained consistent across the platform, with the exception of the TIAA-CREF Lifecycle Funds, which continued to see adjustments in asset allocation. During the fourth quarter of 2014, TIAA-CREF added a strategic allocation to the TIAA-CREF Emerging Markets Debt Fund within the TIAA-CREF Lifecycle Funds. The allocation to the Emerging Markets Debt Fund was offset by a decrease in the target weight to the Bond and Bond Plus Funds. An eight person team manages the emerging markets debt strategies at TIAA-CREF, led by Katherine Renfrew as the lead portfolio manager, a title she has

7 held since The emerging markets debt strategy track record is well-established with longterm results in-line with its benchmark. NEPC views the recent change to include emerging markets debt, and the other adjustments made over the last several years within the TIAA-CREF Lifecycle funds as beneficial enhancements that improve diversification of the funds, consistent with general trends in the target date fund industry. Results for the active Lifecycle funds have been strong over longerterm periods, ranking in the top quartile over the five-year period. Support of Plan Administration In 2014, NEPC provided support to SURS to reduce TIAA-CREF fees for administration through a plan expense reimbursement account. NEPC also worked with SURS to identify TIAA-CREF services that may improve the participant experience through an enhanced enrollment process. Additionally, NEPC collaborated with SURS staff and TIAA-CREF to improve participant investment diversification through targeted communications. In 2015, NEPC is assisting SURS with a provider search. Through the provider search, SURS will be asking a wide range of questions regarding TIAA-CREF plan administration capabilities and investment flexibility. One component of the discovery will be to determine the impact of investment changes. For example, the provider search will explore the potential impact on the cost of administration if SURS were to substitute passive management within the Lifecycle funds to reduce investment fees. Investment Options Review The basic tenets of TIAA-CREF s investment philosophy have remained consistent over time although the organization continuously evaluates and seeks to improve upon the processes and techniques used in the management of its investment options. The investment philosophy of TIAA-CREF adheres to the following four principles: maintain a low-cost structure designed to deliver competitive long-term performance across the indexed and active fund offerings, emphasize the importance of asset allocation and rebalancing to maintain risk and return objectives appropriate to participants, preserve pure asset class exposure in fully-invested portfolios so that offerings are aligned with stated investment objectives and experience minimal style drift, and increase value through disciplined active management that emphasizes bottomup, company-specific research and/or quantitative analysis combined with disciplined adherence to risk guidelines. The TIAA-CREF equity and fixed income investment options in the SMP are broadly diversified offerings with risk characteristics similar to those of the corresponding benchmarks. The indexed strategies perform within a narrow range of the respective benchmarks. CREF options that are not purely passive have low tracking error and performance results similar to the respective benchmarks. TIAA-CREF views risk management as a shared responsibility across the organization which embodies a culture that supports pro-active management of risk and intelligent risk taking

8 decision making. To support these activities, TIAA-CREF has an independent Risk Management Division that reports directly to the President and CEO of the organization. The reporting structure ensures the independence of risk managers to monitor investment decision making and, as appropriate, challenges risk/return judgments made by portfolio managers. The Division has five functional teams focusing on various aspects of risk. The Division in partnership with Investment Management personnel designed and maintains an integrated analytical risk system. Risk Management also operates an Enterprise Risk Management (ERM) governance framework that includes seven integrated risk committees. The overall asset allocation of the SMP investments held by TIAA-CREF is similar to a universe of seven other state plans, listed below, although the SMP is a younger plan than the peers. The largest allocations in assets and contributions of all state plans listed were to the equities and guaranteed asset classes. It is important to note that the investment menus differ at each institution and, as a result, the analysis is based on asset class versus specific fund options. SURS SMP TIAA-CREF Asset Allocation Versus a Peer Universe As of December 31, 2014 Asset Class SURS TIAA-CREF Peer Universe * SURS versus Peers Equities 55% 43% 12% Guaranteed 14% 29% -15% Money Market 3% 2% 1% Fixed Income 10% 5% 5% Real Estate 1% 4% -3% Multi-Asset 8% 7% 1% Lifecycle 9% 10% -1% Total Allocation 100% 100% 0% * Peer universe includes the following plans: Arkansas State University System Nevada System of Higher Education Maryland Public Higher Education Oregon University System Minnesota State Colleges and Universities University of Nebraska Missouri State Employees Retirement Systems Recommendation SURS staff and NEPC jointly recommend that TIAA-CREF be retained as an investment service provider for the SURS Self-Managed Plan.

9 Manager Monitoring Summary The Manager Monitoring Summary below provides a summary for each TIAA-CREF investment option within the SMP. The detailed investment option reviews as of December 2014 follow. TIAA-CREF Funds Last Meeting Date Issues/Comments TIAA Traditional Annuity March 2015 N/A CREF Money Market March 2015 Fees continue to be waived to prevent negative returns and are subject to recovery. CREF Inflation-Linked Bond March 2015 Consistent relative underperformance primarily due to fees. CREF Bond Market March 2015 Positive absolute results in 2014 and trailing multi-year periods despite below median ranking versus peers. CREF Social Choice March 2015 Consistent relative underperformance in balanced portfolio that screens for social criteria. CREF Stock March 2015 Well-established strategy invested in all major equity market segments has experienced lackluster relative results over longer time periods. CREF Growth March 2015 Account terminated in CREF Equity Index March 2015 N/A CREF Global Equities March 2015 Diversified core equity offering has maintained favorable relative results and peer ranking. TIAA-CREF Large-Cap March 2015 N/A Growth Index - Institutional TIAA Real Estate March 2015 Portfolio of directly-owned real estate properties trails the benchmark due to fees and the significant level of short term investments held to meet liquidity needs. TIAA-CREF Lifecycle Fund Series Institutional Class March 2015 Target date fund series of broadly diversified underlying proprietary funds had results similar to respective composite benchmarks, with exception of 2014 underperformance.

10 Investment Option / Benchmark TIAA-CREF Performance December 31, 2014 Returns Inception Date 1 Year 3 Year 5 Year 10 Year TIAA Traditional Annuity Jan % 3.3% 4.2% 4.3% Custom / Citigroup 3 Month Treasury Bill 0.0% 0.1% 0.8% 2.5% CREF Money Market Account Apr % 0.0% 0.0% 1.5% imoneynet Money Fund 0.1% 0.2% 0.2% 1.5% CREF Inflation-Linked Bonds Account May % 0.0% 3.7% 3.9% Barclays Capital US Treasury Inflation Notes Index 3.6% 0.4% 4.1% 4.4% CREF Bond Market Account Mar % 2.9% 4.4% 4.3% Barclays Capital Aggregate Bond Index 6.0% 2.7% 4.4% 4.7% CREF Social Choice Account Mar % 11.4% 9.5% 6.0% Custom Benchmark 1 7.7% 11.9% 10.6% 6.7% CREF Stock Account Aug % 16.8% 11.9% 6.6% Custom Benchmark 2 7.5% 17.2% 12.5% 6.9% CREF Growth Account Apr % 21.2% 15.7% 8.2% Russell 1000 Growth Index 13.0% 20.3% 15.8% 8.5% CREF Equity Index Account Apr % 20.1% 15.2% 7.5% Russell 3000 Index 12.6% 20.5% 15.6% 7.9% CREF Global Equities Account May % 16.2% 10.2% 6.0% MSCI World Index 4.9% 15.5% 10.2% 6.0% TIAA-CREF Large-Cap Growth Index Fund - Institutional Class Oct % 20.0% 15.5% 8.2% Russell 1000 Growth Index 13.0% 20.3% 15.8% 8.5% TIAA Real Estate Account (reported one quarter in arrears) Oct % 10.2% 9.7% 4.7% NCREIF Fund Index - ODCE 11.4% 11.2% 11.1% 5.8% TIAA-CREF Lifecycle Fund Institutional Class Oct % 9.6% 8.3% 5.3% Custom Composite 6.1% 9.2% 8.3% 5.6% TIAA-CREF Lifecycle Fund Institutional Class Oct % 10.6% 8.8% 5.4% Custom Composite 6.4% 10.3% 8.9% 5.7% TIAA-CREF Lifecycle Fund Institutional Class Oct % 11.8% 9.5% 5.5% Custom Composite 6.6% 11.5% 9.6% 5.8% TIAA-CREF Lifecycle Fund Institutional Class Oct % 13.0% 10.1% 5.5% Custom Composite 6.9% 12.8% 10.3% 5.9% TIAA-CREF Lifecycle Fund Institutional Class Oct % 14.1% 10.6% 5.5% Custom Composite 7.1% 14.1% 10.9% 6.0% TIAA-CREF Lifecycle Fund Institutional Class Oct % 15.2% 11.2% 5.7% Custom Composite 7.2% 15.2% 11.5% 6.2% TIAA-CREF Lifecycle Fund Institutional Class Oct % 15.7% 11.4% 6.0% Custom Composite 7.3% 15.9% 11.9% 6.5% TIAA-CREF Lifecycle Fund Institutional Class Nov % 15.7% 11.4% N/A Custom Composite 7.3% 15.9% 11.9% N/A TIAA-CREF Lifecycle Fund Institutional Class Nov % 15.7% 11.4% N/A Custom Composite 7.3% 15.9% 11.9% N/A TIAA-CREF Lifecycle Fund Institutional Class Apr % 15.7% N/A N/A Custom Composite 7.3% 15.9% N/A N/A TIAA-CREF Lifecycle Retirement Income Fund - Institutional Class Nov % 8.5% 7.6% N/A Custom Composite 5.9% 8.1% 7.6% N/A Exhibit 25 1 Custom / 47% Russell 3000 Stock Index / 13% MSCI EAFE + Canada Index / 40% Barclays Capital Aggr Bond Index 2 Custom / 70% Russell 3000 Stock Index / 30% MSCI ACWI ex-u.s. Investable Market Index

11 TIAA Traditional Annuity Fund Objective and Investment Approach The TIAA Traditional Annuity is a guaranteed annuity account backed by the financial strength and claims-paying ability of Teachers Insurance and Annuity Association of America (TIAA) and is supported by the TIAA General Account which is an insurance company account. The Annuity guarantees principal and a contractually specified minimum interest rate, plus offers the opportunity of higher returns through additional amounts in excess of the guaranteed rate. These additional amounts are declared on a year-by-year basis by the TIAA Board of Trustees. When declared, additional amounts remain in effect for the twelve-month period that begins each March 1. TIAA is one of only three insurance groups in the United States to currently hold the highest possible rating from three of the four leading independent insurance company rating agencies: A.M. Best, Fitch Ratings, and Standard & Poor s. TIAA currently holds the second highest possible rating from Moody s Investors Service. TIAA is historically a buy and hold investor, investing for the long run, with a very low turnover rate relative to peers. The TIAA Traditional Annuity is supported by the TIAA General Account whose portfolio holds bonds, commercial mortgages, real estate, stocks and other assets selected based on relative value considerations by specialized teams that target different sectors of the marketplace. The responsibilities of the teams are organized into three primary groups: Global Public Markets, Global Private Markets and Global Real Estate. Asset allocation limits of the Account are 85% bonds, 10% conventional mortgages and 5% investment real estate. Sector limits include 40% corporate bonds, 25% residential mortgage backed securities, 10% asset backed securities, 15% commercial mortgage backed securities and 3% preferred stock. The Account has quality limits including 10% below investment grade assets. The duration of the assets held within the TIAA General Account is structured with a firm consideration of policyholder liabilities. The TIAA Traditional Annuity is a guaranteed annuity account, not a fund, with a management structure that differs from most annuities. The Annuity provides participants crediting rates for accumulating and payout rates, and guarantees are supported by the TIAA General Account. Withdrawals from the Annuity may be made in a lump sum, subject to a 2.5% surrender charge, within 120 days after termination of employment. At all other times, withdrawals and transfers from the Annuity must be spread over an 84-month period in monthly systematic payments from Retirement Choice (RC) contracts or a 120-month period from Group Retirement Account (GRA) contracts. Performance Commentary The TIAA Traditional Annuity is designed to meet the objective of preserving principal and providing a consistent flow of income. The TIAA General Account holds reserves that may be utilized to offset possible future losses within the Annuity. The Annuity is structured to restrict withdrawals to avoid excessive account outflows that could require the General Account to sell assets and, as a result, exhaust the Account.

12 TIAA Traditional Annuity The TIAA Traditional Annuity has matched or surpassed the benchmark results in each of the past ten years. The 4.10% Annuity return exceeded the custom Traditional Annuity index return of 0.03% by 407 basis points in The Traditional Annuity has demonstrated consistent relative outperformance for all trailing multi-year periods presented. Fund Characteristics Total Fund Assets Average Maturity Average Duration Composition Fees Portfolio Manager (tenure) TIAA Traditional Annuity $226.3 billion years 7.47 years (option-adjusted) Asset Backed Securities Mortgage Backed Securities Commercial MBS Commercial Mortgages Treasury/Agency Securities Corporate Bonds Cash (within the wrap) Private Placement High Yield Corporates n/a David Brown (8 years) 3.37% Historical Returns TIAA Traditional Annuity Return Custom Traditional Annuity * Return Return Difference Trailing 3-Year 3.3% 0.1% 3.3 Trailing 5-Year Trailing 10-Year * EK&A Guaranteed Investment Contract Index through December 31, 2010; Citigroup 3 Month Treasury Bill Index as of January 1, Assessment The TIAA Traditional Annuity provides diversification and stability in an option with guaranteed principal and a contractually specified rate of interest, supplemented by additional amounts that may be declared by the TIAA Board of Trustees. The Annuity has had positive relative performance for all time periods presented. We recommend retention of this option.

13 CREF Money Market Account Fund Objective and Investment Approach The CREF Money Market Account is a variable annuity account striving to attain high current income consistent with maintaining liquidity and preserving capital. The Account invests in securities or other high-quality instruments with maturities of 397 days or less. The Account maintains a dollar-weighted average maturity of 60 days or less and a dollar-weighted average life to maturity of 120 days or less. The Money Market Account invests at least 97% of assets primarily in commercial paper, bank obligations and U.S. government-issued securities classified as first-tier securities, those rated within the highest short-term category by at least two nationally recognized statistical rating organizations. The Account is permitted to invest a maximum of 30% of assets in money market and debt instruments of foreign issuers denominated in U.S. dollars. Individual issuer exposures are limited to 5% of the assets. Performance Commentary In 2014, the CREF Money Market Account returned 0.00%, lagging by 13 basis points the imoneynet Money Fund return of 0.13%. More than 50% of the Account assets were invested in U.S. Treasury and agency securities. Short-term U.S. Treasury supply continued to decline during the year, while the commercial paper market also remained tight, with outstanding issuance down by more than $1 trillion since mid Commercial paper yields remained low, as industrial corporations held cash and issued longer-maturity debt to take advantage of low interest rates. The Account sought to hold longer-dated, floating-rate government agency paper, with one- to two-year maturities, in order to capture slightly higher yields. The Account has experienced relative underperformance in the most recent six years and has matched the benchmark return for the trailing ten-year period. TIAA continued to voluntarily waive part or all of the 12b-1 distribution and/or administrative fees, resulting in a non-negative absolute yield for the Account. Any expenses waived after October 1, 2010 are subject to possible recovery by TIAA from the Account for three years after the waiver. The potential for future fee recovery depends on several factors, including Account assets, interest rate levels and the length of time that has elapsed since fees were waived. Any recovery of fees would reduce, but not eliminate, the yield of the Account over the period in which waived fees are recovered.

14 CREF Money Market Account Fund Characteristics CREF Money Market Account Total Fund Assets $11.5 billion 30 Day Current Yield 0.00% Portfolio Composition Commercial Paper 33.77% U.S. Govt Agency Securities U.S. Treasury Bills/Notes Variable Rate Securities, Govt Certificates of Deposit/Other 4.61 Fees 0.40% Annually Portfolio Manager (tenure) Michael Ferraro (16 years) Joseph Rolston (4 years) Historical Returns CREF Money Market Return imoneynet Money Fund Return Return Difference Trailing 3-Year 0.0% 0.2% -0.2 Trailing 5-Year Trailing 10-Year Assessment The CREF Money Market Account has underperformed the benchmark return in the last six years by less than the amount of fees. Given the continued low interest rate environment, fees were waived in 2014 to prevent negative returns. Despite a persistent low level of current income, the Account has maintained liquidity and preserved capital. We recommend retention of this option.

15 CREF Inflation-Linked Bond Account Fund Objective and Investment Approach The CREF Inflation-Linked Bond Account is a variable annuity account pursuing a long-term rate of return that outpaces inflation, primarily through investment in inflation-indexed bonds, which are fixed income securities whose returns are designed to track a specified inflation index over the life of the bond. Under normal circumstances, the Account invests at least 80% of its assets in U.S. Treasury Inflation-Indexed Securities. The Account may invest in other inflation-indexed bonds issued or guaranteed by the U.S. government or its agencies, by corporations and other U.S. domiciled issuers, as well as foreign governments. The Account may also invest in money market instruments or other short-term securities and may invest a maximum of 25% of assets in inflation-indexed bonds issued or guaranteed by foreign governments and their agencies, as well as other foreign issuers. Total return is driven by inflation, income and capital appreciation. Performance Commentary In 2014, the CREF Inflation-Linked Bond Account returned 3.34%, trailing by 30 basis points the Barclays Capital U.S. Treasury Inflation-Protected Securities (TIPS) Index return of 3.64%. Although inflation remained well below its target rate of 2.0%, the Federal Reserve ended its bond-buying stimulus program in October. Fears that interest rate increases could occur too quickly caused volatility within the bond market, but most segments, including TIPS, advanced. Despite concerns over rising U.S. interest rates going forward, longer-term yields declined and inflation expectations remained tame. The Account lagged the benchmark results in nine of the most recent ten years and over the trailing three-, five- and ten-year periods by 42, 41 and 45 basis points, respectively, as a result of fees. The Account s return includes a deduction for expenses, while the benchmark s return does not. Fund Characteristics CREF Inflation-Linked Bond Account Total Fund Assets $7.4 billion Average Maturity 8.52 years Average Duration 7.84 years (option-adjusted) Number of Holdings 39 Fees 0.41% Annually Portfolio Manager (tenure) John Cerra (11 years) Stephen Liberatore (4 years) The historical returns of this fund have been compared to a broad universe of competing funds beginning in 2013.

16 CREF Inflation-Linked Bond Account Historical Returns CREF Inflation-Linked Bond US Treasury Inflation Notes Return Return Rank * Return Rank * Difference Trailing 3-Year 0.0% % Trailing 5-Year Trailing 10-Year * Rank of 1 is best and 100 is worst. Assessment The CREF Inflation-Linked Bond Account is designed to offer participants a modest real rate of return, greater than the inflation rate, by utilizing fixed income securities with fixed-rate coupon payments adjusted for inflation, as measured by the Consumer Price Index for All Urban Consumers (CPI-U). The Account underperformed the benchmark as a result of fees. We recommend retention of this option.

17 CREF Bond Market Account Fund Objective and Investment Approach The CREF Bond Market Account is a variable annuity account that seeks a favorable long-term rate of return, typically through high current income consistent with preserving capital. Under normal circumstances, the Account invests at least 80% of its assets in a broad range of fixed income securities. The majority of the assets are invested in U.S. Treasury and other governmental agency securities, corporate bonds and mortgage-backed or other asset-backed securities. The Account invests a maximum of 20% of assets in below-investment-grade and unrated securities and up to 20% of assets in foreign government and corporate bonds denominated in U.S. dollars. The Account is permitted to overweight or underweight positions in individual securities or sectors when undervalued, overlooked or misunderstood issues offer the potential for superior returns compared to the benchmark index. Performance Commentary In calendar year 2014, the CREF Bond Market Account returned 5.52%, trailing the Barclays Capital U.S. Aggregate Bond Index return of 5.97% by 45 basis points. Strong U.S. economic data and reassuring comments from the Federal Reserve registered positive returns for U.S. fixed-income markets. Falling inflation expectations and strong investor demand relative to supply bolstered the performance of Treasuries and other high-quality sectors, including investment-grade corporate bonds and mortgage-backed securities (MBS). The Account underperformed its benchmark primarily from an underweight to U.S. Treasury securities and MBS. The Account benefited from overweight positions in corporate bonds, asset-backed securities, municipals and commercial MBS. Fund Characteristics CREF Bond Market Account Total Fund Assets $13.5 billion Average Maturity 7.21 years Average Duration 5.33 years (option-adjusted) Number of Holdings 1,461 Portfolio Composition Mortgage Backed Securities Corporate Bonds Foreign Govt & Corp Bonds in USD U.S. Treasury Securities Asset Backed Securities Municipal Bonds Commercial Mortgage Backed Securities U.S. Agency Securities Short Term/Other Fees 0.45% Annually Portfolio Manager (tenure) John Cerra (12 years) Joseph Higgins (3 years) 22.83%

18 CREF Bond Market Account Historical Returns CREF Bond Market Aggregate Bond Index Return Return Rank * Return Rank * Difference Trailing 3-Year 2.9% % Trailing 5-Year Trailing 10-Year * Rank of 1 is best and 100 is worst. Assessment The Bond Market Account provides a broadly diversified portfolio comprised primarily of investment grade fixed income securities. The Account ranks below median in a universe of peers and relative underperformance is typically due to fees. We recommend retention of this option.

19 CREF Social Choice Account Fund Objective and Investment Approach The CREF Social Choice Account is a variable annuity account striving to attain a favorable long-term rate of return that reflects the investment performance of the financial markets while giving special consideration to specific social criteria. The Account s underlying philosophy is to offer competitive returns aligned with investors values through a balanced approach with assets divided approximately 60% in domestic and foreign stocks and approximately 40% in fixed income securities, including money market instruments. To achieve this end, investment options are comprehensively screened for environmental, social and governance (ESG) records, and the portfolio is constructed to offer broadly diversified exposure to socially screened domestic equities, international equities and fixed income. The strategy is expected to exhibit modest tracking error versus the benchmark and seeks to avoid systematic biases that would lead to certain performance tendencies in particular market environments. Since 2002, an established ESG index has been utilized to determine a security s eligibility for inclusion in the Account s portfolio. The domestic equity segment of the Account attempts to track the return of the U.S. stock market, as measured by the Russell 3000 Index, while the foreign equity component strives to match the return of developed foreign markets, as measured by the MSCI EAFE + Canada Index. The fixed income portion pursues a favorable long-term total return consistent with preserving capital, primarily from investment-grade fixed income securities. The Account invests only in companies suitable from a financial perspective and whose activities are consistent with the Account s social criteria. To compensate for the Account s exclusion of some stocks, quantitative modeling and other techniques are utilized in an attempt to match the overall risk characteristics of the portfolio with those of the composite benchmark. Performance Commentary For the year ending December 31, 2014, the CREF Social Choice Account returned 6.83%, trailing by 86 basis points the custom benchmark return of 7.69%. Because of its ESG criteria, the Account did not invest in a number of stocks and bonds included in the composite benchmark. The Account s underperformance was due in part to its exclusion of Apple, Microsoft and Facebook. The losses were partially offset by the absence of energy giants Exxon Mobil, Chevron and BP, whose stock values dropped as oil prices plunged. The Account also benefited from the exclusion of General Electric and Amazon.com. The Account s fixed income component outpaced the Barclays U.S. Aggregate Bond Index, with the largest positive contribution being derived from holdings in U.S. Treasury, government-related agency and commercial mortgage-backed securities. The performance of the bond segment also helped to partially offset the negative effects of the Account s stock holdings, relative to its composite benchmark. The Account has a median ranking relative to a universe of peers and underperformed its benchmark in the trailing three-, five- and ten-year periods by 49, 109 and 69 basis points, respectively.

20 CREF Social Choice Account Fund Characteristics CREF Social Choice Account Total Fund Assets $14.4 billion Target Allocation Stocks Bonds Actual Allocation Stocks Bonds Short Term Investments/Other Number of Holdings 1,909 Stock Focus Core Average Maturity 8.53 years Average Duration 5.73 years (option-adjusted) Turnover 133% (as of 12/31/13) Fees 0.41% Annually Portfolio Manager (tenure) Jim Campagna (9 years) Stephen Liberatore (10 years) Lei Liao (<1 year) 45-75% %

21 CREF Social Choice Account Historical Returns CREF Social Choice Custom Social Choice** Return Return Rank * Return Rank * Difference Trailing 3-Year 11.4% % Trailing 5-Year Trailing 10-Year * Rank of 1 is best and 100 is worst. * 60% Dow Jones US Total Stock Market / 40% Barclays Capital Aggregate Bond through December 31, % Russell 3000 / 13% MSCI EAFE + Canada / 40% Barclays Capital Aggregate Bond since January 1, Assessment The CREF Social Choice Account is balanced among stocks, bonds and money market instruments, incorporating environmental, social and governance (ESG) criteria for selection of securities. By design, the Account may be less volatile than a stock account. Relative performance has consistently trailed the composite benchmark, partially due to fees. We recommend retention of this option.

22 CREF Stock Account Fund Objective and Investment Approach The CREF Stock Account is a variable annuity account seeking a favorable long-term rate of return through capital appreciation and investment income by investing primarily in a broadly diversified portfolio of common stocks. Under normal circumstances, the Account invests at least 80% of its assets in a broadly diversified portfolio of equity securities representing all major equity market segments, including large-, mid- and small-cap stocks, both domestically and within foreign developed and emerging markets. The Account employs a multi-manager approach, utilizing a combination of active management, enhanced indexing and pure indexing investment strategies. Allocation decisions among underlying portfolio segments are determined in relation to benchmark sector and industry weightings and in relation to long-term allocation guidelines. The Account focuses on stocks of companies that appear to be attractively priced, based on a detailed analysis of their prospects for growth in earnings, cash flow, revenues and other relevant measures. The portfolio also may hold securities of companies whose assets appear undervalued in the market. The Account normally maintains the weightings of its holdings as approximately 70-75% domestic equity and 25-30% foreign equities. Within the foreign equities weightings, approximately 5% of the Account will be emerging market investments and approximately 3% will be foreign developed market small-cap investments. The allocation of the Account has gradually changed to more active management over the past ten years, as indicated below. Fundamental Quantitative Year Active Active Index % 25% 18% % 24% 22% % 22% 31% % 22% 34% % 20% 36% % 20% 44% % 19% 47% % 18% 48% % 20% 49% % 19% 53%

23 CREF Stock Account Performance Commentary In 2014, the CREF Stock Account return of 6.40% underperformed the composite benchmark return of 7.55% by 115 basis points. During the year, the Account generated a solid absolute gain amid the positive equity market. The Account trailed its composite benchmark partly because of stock selections that did not perform as anticipated. Among individual stock choices, overweight investments in General Motors and Talisman Energy detracted from relative performance. The Account s return was enhanced by numerous favorable stock selections. The largest individual contributors were overweight positions in chemical firm LyondellBasell and transportation company Union Pacific. The Account also benefited from participating in a securities lending program during the twelve-month period. The Account s returns may sometimes diverge from the returns of its benchmark more than would be expected, which may be the result of the Account s fair value pricing adjustments or of the timing of foreign currency valuations. Although changes in foreign currency valuations are not reflected immediately in the benchmark returns, they are taken into consideration when valuing the Account s portfolio holdings; these are known as fair value pricing adjustments and detracted from the Account s relative performance in The Account has lagged the composite benchmark in the trailing three-, five- and ten-year periods by 32, 60 and 30 basis points, respectively, due to fees. The Account is ranked below the median in a universe of peers. Fund Characteristics Total Fund Assets Style Characteristics Capitalization Focus Level of Diversification Composition CREF Stock Account $124.6 billion Core Large Diversified U.S. Stocks 68.77% Non-U.S. Stocks Short term Invest (3-year) Market Risk (Beta) Number of Holdings 9,544 Turnover 59% Fees 0.46% Annually Portfolio Manager (tenure) Hans Erickson (18 years) William Riegel (15 years) Saira Malik (6 years) Thomas Franks (4 years)