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, 2014 Re: TIAA-CREF Annual Review Investment Department Overview Teachers Insurance and Annuity Association College Retirement Equities Fund (TIAA-CREF) was approved as a provider for the Self-Managed Plan (SMP) upon the Plan s April 1998 implementation. As of December 31, 2013, approximately 8,600 of the 18,056 SMP participants have utilized TIAA-CREF investment options. The provider manages $564 million, or 40.9%, of the SMP assets. Listed below is a breakdown of assets invested in 12 TIAA-CREF offerings. Inception Date in Value as of % of TIAA-CREF Investment Options the SMP December 31, 2013 Assets TIAA Traditional Annuity April 1998 $81,333, % CREF Money Market Account April ,311, % CREF Inflation-Linked Bond Account July ,991, % CREF Bond Market Account April ,470, % CREF Social Choice Account April ,345, % CREF Stock Account April ,799, % CREF Growth Account * April 1998 * 349, % CREF Equity Index Account April ,272, % CREF Global Equities Account April ,748, % TIAA-CREF Large-Cap Growth Index Fund Instl Cl May ,189, % TIAA Real Estate Account August ,095, % TIAA-CREF Lifecycle Fund 2010 Institutional Cl September ,002, % TIAA-CREF Lifecycle Fund 2015 Institutional Cl September ,638, % TIAA-CREF Lifecycle Fund 2020 Institutional Cl September ,922, % TIAA-CREF Lifecycle Fund 2025 Institutional Cl September ,788, % TIAA-CREF Lifecycle Fund 2030 Institutional Cl September ,264, % TIAA-CREF Lifecycle Fund 2035 Institutional Cl September ,478, % TIAA-CREF Lifecycle Fund 2040 Institutional Cl September ,016, % TIAA-CREF Lifecycle Fund 2045 Institutional Cl August ,199, % TIAA-CREF Lifecycle Fund 2050 Institutional Cl August ,465, % TIAA-CREF Lifecycle Fund 2055 Institutional Cl November , % TIAA-CREF Lifecycle Retirement Inc Fund - Instl Cl August , % TIAA-CREF Total $564,382, % * Terminated May 2004

2 Organizational Review Teachers Insurance and Annuity Association (TIAA) was founded in 1918 by the Carnegie Corporation of New York and the Carnegie Foundation to support the financial well-being of college teachers through a system of annuities and low-cost life insurance. The College Retirement Equities Fund (CREF) was founded in 1952 in New York as a companion non-profit 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 Separate boards comprised of annually-elected trustees govern TIAA and CREF. The TIAA Board of Overseers which elects the members of the TIAA Board of Trustees holds the nonprofit stock ownership of TIAA. In contrast, the CREF Board of Overseers which generally has a legal function similar to that of shareholders holds the non-profit stock ownership of CREF. CREF participants, however, elect the CREF Board of Trustee members since CREF is a management investment company registered with the SEC. Mr. Roger W. Ferguson, Jr., has served as President and CEO of TIAA-CREF since April The TIAA and CREF boards currently consist of approximately 50% academicians, 36% women and 24% minorities. TIAA- CREF has a long history in corporate governance and social responsibility endeavors and became a signatory to the United Nations-supported Principles for Responsible Investment in March TIAA-CREF, headquartered in New York City, has in excess of 8,900 employees. The major investment centers are located in New York City and San Francisco, California. The major operations centers, serving as call centers and providing premium administration and benefit payment services, are located in Charlotte, North Carolina, and Denver, Colorado. A third phone center is operated in Dallas, Texas. SURS SMP administration and recordkeeping services are provided by the Denver operations center. TIAA-CREF has a network of 111 local offices throughout the United States that provides counseling, education and advice services to plan administrators and participants. The TIAA-CREF office located in Chicago, supported by 87 employees, is responsible for SURS SMP counseling support. 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) currently holds the highest possible ratings from the four leading insurance company rating agencies: Standard & Poor s (AA+), Moody's Investors Service (Aaa), 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. Clients/Assets The TIAA General Account and Real Estate Account and the CREF variable annuities and mutual funds had total retirement plan assets under management in excess of $408 billion as of December 31, Total combined assets under management, including all non-pension assets, were $564 billion at December 31, 2013.

3 TIAA-CREF is among the largest providers of retirement benefits, serving 4 million active and retired participants from more than 15,000 plan sponsor clients. TIAA-CREF gained 73 client plans and lost 14 plans in Gains were the result of new plan acquisitions and multi-vendor or sole recordkeeping decisions which increased assets under management by $24 billion. Client losses from mergers, acquisitions or a competitive bid process reduced assets under management by $3 billion. SURS Client Service Team SURS has received client service for more than four years from the following TIAA-CREF Institutional Relationship professionals: Director, Relationship Management Antoinette (Toni) Block Chicago Senior Relationship Manager Eileen Finnegan Chicago Relationship Manager Matthew VanMoorleghem Chicago Client Service Consultant Russell Dockett Denver Ms. Eileen Finnegan has accepted another position internal to TIAA-CREF and is currently transitioning from her responsibilities for SURS account. TIAA-CREF is in the process of hiring a senior relationship manager to serve SURS account. Ms. Paula Smith, Communications Consultant, joined SURS client service team during 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 No administrative fee is paid by SURS 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. The fees assessed by TIAA-CREF in eight categories fluctuated between one and two basis points in calendar year 2013 while one type of fund experienced no change in fee. Two options transferred to lower-cost share classes in 2013, significantly reducing fees. The low-cost fee structure of TIAA-CREF, designed to enhance the long-term performance of its investment options and participant net investment returns, is currently maintained through a focus on incorporating technological operating efficiencies in the organization s website.

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 2013 weighted average median fee for Morningstar mutual funds was 0.67%, as compared to the 2012 weighted average median fee of 0.65% for Callan Associates mutual funds. The 2013 weighted average expense ratio for SMP options offered by TIAA- CREF was 0.41%, a decrease from 0.47% for As indicated by the table below, TIAA- CREF expense ratios are below the average in eight of the nine actively managed categories and in one of the two passively managed categories. The fee review indicates TIAA-CREF offers products at a lower cost than comparable investment options, permitting SMP participants access to investment options at a favorable, competitive cost. As discussed in the Pricing section below, the TIAA-CREF Lifecycle Fund Series transferred from the Premier share class to the Institutional share class in June 2013, providing savings to participants by lowering the expense ratio of each fund by 15 basis points. At the same time, the TIAA-CREF Large Cap Growth Index Fund transferred from the Retirement Class to the lowercost Institutional Class, reducing the expense ratio by 26 basis points. Investment Cost Comparison with 2013 Market Averages Mutual SURS Fee Type of Fund Fund (1) TIAA-CREF Differences Annuity * Money Market Active Bond Passive Bond 0.20 N/A N/A TIPS Balanced (Social Choice) Lifecycle U.S. Stock ** U.S. Stock Large Growth U.S. Stock Index U.S. Stock Growth Index International Stock 1.00 N/A N/A World Stock (Global) Real Estate Weighted Average Expense Ratio (1) Morningstar expense data was used to calculate institutional mutual fund median fees. * Annuity products do not have a stated expense ratio. ** Proprietary and non-proprietary funds combined.

5 Annuity Provider At retirement, SMP participants may elect to receive monthly fixed annuity or variable annuity payments from TIAA-CREF. 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 Investment Options Consideration The menu of SMP investment offerings is continually monitored by SURS staff to assure the array of approved options complies with the objectives of the SMP Investment Policy. SURS staff, with assistance from Fidelity and TIAA-CREF professionals, researches available funds based on performance, risk, cost, and asset class diversification. TIAA-CREF periodically completes a gap analysis to identify asset classes not included in the lineup of SMP investment offerings. The current analysis indicates no offerings through TIAA-CREF in the mid cap, small cap, international and emerging markets equity asset classes. In addition, the SMP has no exposure to short-term fixed income, high yield bond or international/global bond through investment options available through TIAA-CREF. The results of the analysis assist SURS staff in assessing the approved SMP investment options. As new products are developed, the offerings are assessed for potential inclusion in the SMP to enhance the lineup of options or to replace a fund that performs at an unacceptable level over an extended period of time. At this time, no new funds are being recommended for the SMP. 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. CREF Bond Market Account: Mr. Steven Raab, Portfolio Manager focused on mortgages, left the three-member investment management team in 2013 after serving on the Account team for approximately two years. CREF Stock Account: Over the past ten years, the allocation of management techniques has shifted to favor active management while reducing reliance on index management. TIAA-CREF Lifecycle Fund Series: The international equity and fixed income allocations were adjusted in Specifically, the international equity component of the overall total equity allocation was increased and the composite benchmark was changed. In addition, target weightings of three underlying fixed income funds were adjusted at points along the glide path closer to or in retirement.

6 Pricing As new, lower-cost share classes of TIAA-CREF mutual funds become available, TIAA-CREF reviews them to determine whether the SMP meets the eligibility criteria for the share class. As a result, the SMP transferred to the Institutional share class of the TIAA-CREF Lifecycle Funds in June 2013, lowering the expense ratio of each fund in the series by 15 basis points. In addition, the TIAA-CREF Large Cap Growth Index Fund transferred in June 2013 to the lowercost Institutional share class, reducing the expense ratio of the fund by 26 basis points. As a result, SMP participants are receiving the lowest cost share classes of mutual funds available from TIAA-CREF. The variable annuity products are offered at cost to SMP participants. Operational Process Issues TIAA-CREF has responded timely to SURS requests in administrative and operational areas. SURS staff and TIAA-CREF professionals jointly continue to explore alternative solutions to specific challenges in various asset distribution processes. These efforts are aided by SURS documentation of non-compliance issues. TIAA-CREF currently is experiencing turnover in staff responsible for operational processes for SURS participants which, in addition to the turnover in the Senior Relationship Manager position, is expected to cause service disruptions. Consultant Comments TIAA-CREF is a leading provider of lifetime retirement income to those who work in the academic, research, medical and cultural fields. The firm was established in 1918 and currently has over 8,900 employees spread across 111 offices worldwide. Investment professional turnover is limited and the firm prides itself on a non-hierarchical structure. TIAA-CREF has approximately $564 billion in assets under management across more than 4 million participants as of December 31, TIAA-CREF has over 120 portfolio managers with an average 17 years of investment experience. The investment teams are broken up into equity, fixed income and direct real estate. On the domestic equity side, specialization areas include core, value and quantitative strategies. Fixed Income expertise includes investment grade, high yield and emerging markets debt. Global Real Estate focus includes specialization with acquisitions, dispositions/financings and commercial mortgages. There were relatively few significant changes across the TIAA-CREF organization and investments in Highlights include a change in senior leadership at TIAA-CREF Asset Management, a partial manager change on CREF Bond Market Account, and asset allocation changes within the TIAA-CREF Lifecycle funds. On June 24, 2013, TIAA-CREF announced the addition of Robert Leary as Executive Vice President and President of TIAA-CREF Asset Management. Mr. Leary was most recently President and COO of ING Investment Management and his responsibility at TIAA-CREF will include oversight for all investment professionals within TIAA-CREF Asset Management. There was a partial portfolio management team change on CREF Bond Market Account with the departure of Steven Raab in Mr. Raab was one of three co-portfolio managers on the strategy, focused primarily on mortgage backed securities. Joseph Higgins, the CREF Bond Market Account s lead portfolio manager, and John Cerra will continue to be portfolio managers

7 for the Bond Market Account. The departure of Mr. Raab is not expected to materially impact the investment process due to the depth of the portfolio management team. The TIAA-CREF Lifecycle funds have had a series of changes to the underlying funds and asset allocation over the past several years. These changes include: increase maximum equity exposure (2007), increase international equity exposure (2007), add high-yield bonds (2007), add additional enhanced index and actively managed funds (2008, 2009, 2010, 2011, 2013), add emerging markets (2010), add global natural resources (2011), and add tactical asset allocation component to process (2012). In 2013, the international equity and fixed income weights were adjusted slightly to increase diversification, and the TIAA-CREF International Opportunities fund was added as an underlying fund. NEPC views the changes 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 recent and longer-term periods, with most target dates ranking in the top quartile over the five-year period. Looking forward, NEPC will support SURS in continuing to enhance the Self-Managed Plan. Proposed initiatives for the coming year include investigating opportunities to reduce plan costs through a plan expense reimbursement account, identifying services to streamline operations and improve participant experience, and considering investment menu substitutions to reduce overlap and give participants greater diversification opportunities. Investment Options Review The TIAA-CREF investment philosophy has remained unchanged over time although processes and techniques are continuously evaluated for potential enhancement. The investment philosophy is guided by four basic tenets, as follows: maintain a low-cost structure designed to deliver offerings with competitive longterm performance, emphasize the importance of asset allocation and rebalancing to address participant risk and return objectives, preserve pure asset class exposure so that offerings perform in line with stated investment objectives and with minimal style drift, and increase value through disciplined active management. TIAA-CREF utilizes pure exposure to markets, strives to be fully invested in each of its portfolios, controls expenses and monitors risk parameters. The cost savings achieved through the low cost structure provides lower fund expenses across the indexed and active fund offerings and enhances long-term performance. The TIAA-CREF equity and fixed income investment options in the SMP are broadly diversified and have risk characteristics similar to those of the corresponding benchmarks. The purely indexed strategies are highly correlated to the respective benchmarks and perform within a narrow range, similar to the level of the products expense ratios. CREF options that are not purely passive have low tracking error, with performance results similar to the respective benchmarks.

8 Risk management is viewed as a shared responsibility across the firm which embraces a supportive culture of pro-active risk management and intelligent risk taking decision making. TIAA-CREF maintains an independent Enterprise Risk Management Division reporting directly to the organization s President and CEO. As a result, risk managers retain independence to monitor investment decision making and, as appropriate, challenge portfolio manager risk/return judgments. The Division includes five functional teams focusing on various aspects of risk. Risk Management also operates an Enterprise Risk Management (ERM) governance framework comprised of seven integrated risk committees. The overall asset allocation of the SMP investments held by TIAA-CREF is largely consistent with a universe of seven other state plans, as shown below, although the SMP is a younger plan than the peers. In all cases, the largest allocations in assets and contributions 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, 2013 Asset Class SURS TIAA-CREF Peer Universe * SURS versus Peers Equities 56% 43% 13% Guaranteed 15% 25% -10% Money Market 3% 3% 0% Fixed Income 10% 5% 5% Real Estate 1% 3% -2% Multi-Asset 8% 15% -7% Lifecycle 7% 6% 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 recommends 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 2013 follow. TIAA-CREF Funds Last Meeting Date Comments TIAA Traditional Annuity March 2014 N/A CREF Money Market March 2014 Fees, currently waived to avoid negative returns in low current income environment, are subject to recoupment. CREF Inflation-Linked Bond March 2014 Rising interest rates impacted TIPS, resulting in negative absolute returns. CREF Bond Market March 2014 Favorable longer-term relative performance. One of three portfolio managers left in CREF Social Choice March 2014 Balanced strategy with social criteria consistently lags custom benchmark partially due to fees. CREF Stock March 2014 Mixed relative results in trailing time periods as management techniques shifted to favor active management. CREF Growth March 2014 Account terminated in CREF Equity Index March 2014 All sectors contributed to a strong absolute return in 2013 while performance trailed the benchmark as a result of fees. CREF Global Equities March 2014 Consistent outperformance versus benchmark in globally diversified core equity option. TIAA-CREF Large-Cap Growth Index - Institutional March 2014 Passively-managed option returns consistently trail the benchmark as a result of fees. TIAA Real Estate March 2014 Portfolio of diversified directly-owned real estate maintains liquidity to accommodate cash flows and investment opportunities. TIAA-CREF Lifecycle Fund Series Institutional Class March 2014 Changes implemented in 2013 to international equity and fixed income allocations for improved diversification and enhanced risk-adjusted performance. All funds in the series outperformed the respective composite benchmarks in 2013.

10 Investment Option / Benchmark TIAA-CREF Performance December 31, 2013 Returns Inception Date 1 Year 3 Year 5 Year 10 Year TIAA Traditional Annuity Jan % 3.6% 4.6% 4.4% Custom / Citigroup 3 Month Treasury Bill 0.1% 0.1% 1.7% 2.9% CREF Money Market Account Apr % 0.0% 0.0% 1.6% imoneynet Money Fund 0.2% 0.2% 0.2% 1.6% CREF Inflation-Linked Bonds Account May % 3.1% 4.9% 4.4% Barclays Capital US Treasury Inflation Notes Index -8.6% 3.5% 5.6% 4.8% CREF Bond Market Account Mar % 3.3% 4.7% 4.1% Barclays Capital Aggregate Bond Index -2.0% 3.3% 4.4% 4.5% CREF Social Choice Account Mar % 9.7% 12.6% 6.2% Custom Benchmark % 10.7% 13.0% 6.8% CREF Stock Account Aug % 12.5% 16.8% 7.3% Custom Benchmark % 13.1% 16.8% 7.6% CREF Growth Account Apr % 16.5% 20.0% 7.5% Russell 1000 Growth Index 33.5% 16.5% 20.4% 7.8% CREF Equity Index Account Apr % 15.8% 18.3% 7.5% Russell 3000 Index 33.6% 16.2% 18.7% 7.9% CREF Global Equities Account May % 11.6% 15.7% 6.9% MSCI World Index 26.7% 11.5% 15.0% 7.0% TIAA-CREF Large-Cap Growth Index Fund - Institutional Class Oct % 16.1% 20.0% 7.4% Russell 1000 Growth Index 33.5% 16.5% 20.4% 7.8% TIAA Real Estate Account (reported one quarter in arrears) Oct % 12.4% -0.9% 4.8% NCREIF Fund Index - ODCE 11.5% 13.0% -0.8% 5.7% TIAA-CREF Lifecycle Fund Institutional Class Oct % 8.5% 11.2% N/A Custom Composite 11.3% 8.2% 10.6% N/A TIAA-CREF Lifecycle Fund Institutional Class Oct % 9.1% 12.1% N/A Custom Composite 13.3% 8.9% 11.5% N/A TIAA-CREF Lifecycle Fund Institutional Class Oct % 9.8% 13.1% N/A Custom Composite 15.9% 9.7% 12.5% N/A TIAA-CREF Lifecycle Fund Institutional Class Oct % 10.6% 14.0% N/A Custom Composite 18.6% 10.5% 13.5% N/A TIAA-CREF Lifecycle Fund Institutional Class Oct % 11.4% 14.9% N/A Custom Composite 21.3% 11.4% 14.4% N/A TIAA-CREF Lifecycle Fund Institutional Class Oct % 12.1% 15.8% N/A Custom Composite 23.9% 12.2% 15.4% N/A TIAA-CREF Lifecycle Fund Institutional Class Oct % 12.5% 16.1% N/A Custom Composite 25.5% 12.7% 15.7% N/A TIAA-CREF Lifecycle Fund Institutional Class Nov % 12.5% 16.0% N/A Custom Composite 25.5% 12.7% 15.7% N/A TIAA-CREF Lifecycle Fund Institutional Class Nov % 12.5% 16.0% N/A Custom Composite 25.5% 12.7% 15.7% N/A TIAA-CREF Lifecycle Fund Institutional Class Apr % N/A N/A N/A Custom Composite 25.5% N/A N/A N/A TIAA-CREF Lifecycle Retirement Income Fund - Institutional Class Nov % 7.8% 9.9% N/A Custom Composite 9.0% 7.4% 9.5% N/A 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 stability, financial strength and claims-paying ability of TIAA. The primary objective of the Annuity is the guarantee of principal and a contractually specified minimum interest rate. It also offers the potential for greater growth 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 hold the highest ratings currently awarded from all four leading independent insurance company rating agencies: A.M. Best, Fitch Ratings, Moody s Investors Service and Standard & Poor s. TIAA is historically a buy and hold investor, investing for the long run. The Account portfolio is comprised of bonds, commercial mortgages, real estate, stocks and other assets selected by specialized teams that target different sectors of the marketplace. Individual investments are selected based on relative value considerations, portfolio fit and individual issuer/borrower (guideline) considerations. The Account follows specific guidelines and investment limits, including 85% bonds, 10% conventional mortgages and 5% investment real estate. Sectors are limited to 40% corporate bonds, 25% residential mortgage backed securities, 10% asset backed securities, 15% commercial mortgage backed securities and 3% preferred stock. Quality limits include 10% below investment grade assets. The TIAA Traditional Annuity is a guaranteed insurance contract and not an investment for Federal Securities Law purposes. 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 120-month period from Group Retirement Account (GRA) contracts. Performance Commentary The TIAA Traditional Annuity has consistently met the objective of preserving principal and providing a consistent flow of income. TIAA maintains reserves for the purpose of absorbing possible future losses within the TIAA General Account holdings. Liquidity restrictions of the TIAA Traditional Annuity are designed to protect participants by preventing excessive account withdrawals that could require the TIAA General Account to sell assets and, in the process, deplete the Account. For each of the past ten years, the TIAA Traditional Annuity has matched or outperformed the benchmark. In 2013, the Annuity returned 3.28%, outpacing the custom Traditional Annuity index return of 0.05% by 323 basis points. The Traditional Annuity has demonstrated solid relative outperformance for all longer time periods presented.

12 TIAA Traditional Annuity Fund Characteristics Total Fund Assets Average Maturity Average Duration Composition Fees Portfolio Manager (tenure) TIAA Traditional Annuity $218.6 billion years 7.47 years (option-adjusted) Asset Backed Securities Mortgage Backed Securities Commercial MBS Commercial Mortgages Treasury/Agency Securities Corporate Bonds Cash Private Equity Direct Real Estate Other n/a David Brown (7 years) 7.96% Historical Returns TIAA Traditional Annuity Return Custom Traditional Annuity * Return Return Difference % 3.9% Trailing 3-Year 3.6% 0.1% 3.6 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 is a well-established option offering a guarantee of principal and a contractually specified rate of interest that is backed by the assets in the TIAA General Account. The TIAA Traditional Annuity has matched or outperformed the benchmark for all annual and longer time periods presented. We recommend retention of this option.

13 CREF Money Market Account Fund Objective and Investment Approach The CREF Money Market Account, a variable annuity account, pursues high current income consistent with maintaining liquidity and preserving capital. Investments utilized by the Account are securities or other high-quality instruments maturing in 397 days or less. The Account portfolio has 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 primarily in commercial paper, bank obligations and U.S. government-issued securities classified as first-tier securities, meaning they are rated within the highest category by at least two nationally recognized statistical rating organizations. Up to 30% of the Account s assets can be invested in money market and debt instruments of foreign issuers denominated in U.S. dollars. Performance Commentary The CREF Money Market Account returned 0.00% in 2013, trailing the imoneynet Money Fund return of 0.16% by 16 basis points. Amid falling yields and diminished supplies of money market instruments, the Account sought advantageous investment opportunities while complying with SEC regulations. The Account maintained more than half of its portfolio in U.S. Treasury and agency securities. For higher yields, it purchased longer-term U.S. government floating-rate securities and selectively invested in high-quality Pacific Rim banks in addition to Canadian and Australian institutions. The Account has had consistent relative underperformance over the past five years and has matched the benchmark return for the ten-year period. Given the persistence of the low interest rate environment and to avoid realizing negative returns, TIAA has voluntarily waived part or all of the 12b-1 distribution expenses and/or administrative expenses of 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 will depend upon a number of 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 $12.0 billion Average Weighted Maturity 51 days 30 Day Current Yield 0.00% Number of Holdings 308 Portfolio Composition Commercial Paper 35.24% U.S. Govt Agency Securities U.S. Treasury Bills/Notes Floating Rate Securities, Govt Certificates of Deposit/Other 6.05 Fees 0.41% Annually Portfolio Manager (tenure) Michael Ferraro (15 years) Joseph Rolston (3 years) Historical Returns CREF Money Market imoneynet Money Fund Return Return Return Difference % 0.8% Trailing 3-Year 0.0% 0.2% -0.2 Trailing 5-Year Trailing 10-Year Assessment The CREF Money Market Account has lagged its benchmark return in the last five years, trailing by less than the amount of fees. The Account continued waiving fees in 2013 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, a variable annuity account, seeks a long-term rate of return that outpaces inflation by primarily utilizing inflation-indexed bonds, which are fixed income securities having returns that track a specified inflation index over the life of the bond. The Account typically holds a minimum of 80% of its assets in U.S. Treasury Inflation-Indexed Securities. The Account is permitted to 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. Investments in money market instruments or other short-term securities are also allowed. A maximum of 25% of assets may be invested in inflation-indexed bonds issued or guaranteed by foreign governments and their agencies, as well as other foreign issuers. The portfolio is constructed to provide performance and risk characteristics similar to the Account s benchmark. Performance Commentary The CREF Inflation-Linked Bond Account returned -9.02%, lagging the Barclays Capital U.S. Treasury Inflation-Protected Securities (TIPS) Index return of -8.61% by 41 basis points for calendar year With inflation still well below its target of 2.5%, the Federal Reserve continued its massive monthly bond buying program in an effort to stimulate the economy by restraining long-term interest rates. As the economy slowly improved, investors worried that the Fed might soon taper its accommodative policies. Rising interest rates pushed down the values of many existing bonds, including those of TIPS. The Account underperformed the benchmark in nine of the last ten years and over the three-, five- and ten-year periods by 45, 71 and 47 basis points, respectively, primarily due to 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 $7.6 billion Average Maturity 8.39 years Average Duration 7.81 years (option-adjusted) Number of Holdings 34 Fees 0.44% Annually Portfolio Manager (tenure) John Cerra (10 years) Stephen Liberatore (3 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 % 8.5% Trailing 3-Year 3.1% % Trailing 5-Year Trailing 10-Year Assessment The CREF Inflation-Linked Bond Account offers a degree of protection from the effects of inflation through a portfolio of fixed income securities with fixed-rate coupon payments whose payments are adjusted for inflation, as measured by the Consumer Price Index for All Urban Consumers (CPI-U). The consistent level of relative underperformance of the Account is primarily attributable to fees. We recommend retention of this option.

17 CREF Bond Market Account Fund Objective and Investment Approach The CREF Bond Market Account, a variable annuity account, pursues a favorable long-term rate of return, primarily through high current income consistent with preserving capital. The Account typically holds a minimum of 80% of its assets in a broad range of fixed income securities, including U.S. government and agency securities, corporate bonds and mortgage backed or other asset backed securities. The Account is permitted to invest a maximum of 20% of assets in below-investment-grade and unrated securities and up to 20% of assets in foreign securities, including emerging market fixed income securities and non-dollar-denominated instruments. The Account may hold 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 The -2.01% return of the CREF Bond Market Account for 2013 surpassed the Barclays Capital U.S. Aggregate Bond Index return of -2.02% by 1 basis point. The Account s performance, though negative, closely matched that of the benchmark. The Account benefited most from its significantly underweight position in U.S. Treasuries. Overweight holdings and advantageous security selections among government-related credit securities also aided the Account s relative performance, as did an underweight in mortgage-backed securities. Mr. Steven Raab, Portfolio Manager focused on mortgages, left the management team in The Account outperformed the benchmark for the three- and five-year periods by 8 and 29 basis points, respectively, and trailed the benchmark for the ten-year period by 41 basis points. Fund Characteristics CREF Bond Market Account Total Fund Assets $34.1 billion Average Maturity 6.94 years Average Duration 5.23 years (option-adjusted) Number of Holdings 1,277 Portfolio Composition Mortgage Backed Securities Corporate Bonds Foreign Govt & Corp Bonds in USD U.S. Treasury and Agency Securities Asset Backed Securities Municipal Bonds Commercial Mortgage Backed Securities U.S. Agency Securities Short Term/Other Fees 0.44% Annually Portfolio Manager (tenure) John Cerra (11 years) Joseph Higgins (2 years) 25.27%

18 CREF Bond Market Account Historical Returns CREF Bond Market Aggregate Bond Index Return Return Rank Return Rank Difference % % Trailing 3-Year 3.3% % Trailing 5-Year Trailing 10-Year Assessment The Bond Market Account experienced favorable relative results over the past five years and offers a broadly diversified portfolio comprised primarily of investment grade fixed income securities. Underperformance for the ten-year period is the result of fees. One of three Account portfolio managers left the team in We recommend retention of this option.

19 CREF Social Choice Account Fund Objective and Investment Approach The CREF Social Choice Account, a variable annuity account, seeks a favorable long-term rate of return similar to the investment performance of the financial markets while giving special consideration to certain social criteria. The Account is a balanced strategy, with approximately 60% of assets invested in domestic and foreign stocks and approximately 40% in bonds and other fixed income securities, including money market instruments. The domestic equity component 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 portion strives to match the return of developed international markets, as measured by the MSCI EAFE + Canada Index. The fixed income segment seeks a favorable long term total return from investment-grade fixed income securities. The Account invests only in companies that are 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 The CREF Social Choice Account returned 16.67% in 2013, slightly trailing the custom benchmark return of 16.70% by 3 basis points. The underperformance was due in part to the exclusion of biotechnology firm Celgene and Facebook, both of which registered triple-digit gains, and German drug maker Bayer as well as two well-performing automobile manufacturers, Daimler and Toyota. The Account s fixed income component outpaced the Barclays U.S. Aggregate Bond Index, with the largest positive contribution being a significant underweight position in U.S. Treasury securities, which lagged the broad bond market for the year. The Account underperformed its benchmark in the three-, five- and ten-year periods by 100, 41 and 63 basis points, respectively. Fund Characteristics CREF Social Choice Account Total Fund Assets $13.3 billion Target Allocation Stocks Bonds Actual Allocation Stocks Bonds Short Term Investments/Other Number of Holdings 2,031 Stock Focus Core Average Maturity 7.39 years Average Duration 5.25 years (option-adjusted) Turnover 149.0% Fees 0.45% Annually Portfolio Manager (tenure) Jim Campagna (8 years) 45-75% %

20 CREF Social Choice Account Historical Returns CREF Social Choice Custom Social Choice* Return Return Rank Return Rank Difference % % Trailing 3-Year 9.7% % Trailing 5-Year Trailing 10-Year * 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 screens potential investment options on environmental, social and governance (ESG) criteria utilizing the MSCI ESG research process to construct a balanced portfolio of equity and fixed income securities. The Account has underperformed the composite benchmark in longer time periods, partially due to fees. We recommend retention of this option.

21 CREF Stock Account Fund Objective and Investment Approach The CREF Stock Account, a variable annuity account, strives to attain a favorable long-term rate of return through capital appreciation and investment income utilizing a broadly diversified portfolio of common stocks. The Account normally invests a minimum of 80% of its assets in equity securities of domestic and foreign companies utilizing a variety of different investment strategies to focus on stocks 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. Companies whose assets appear undervalued in the market are sought for inclusion in the portfolio. The Account may invest in companies of any market capitalization size, including small companies, and seeks to maintain the weightings of its holdings as approximately 70-75% domestic equity and 25-30% foreign equities, with up to a 5% allocation to emerging market investments. Over the past ten years, the allocation of the Account gradually changed to more active management, as indicated below. Year Fundamental Active Quantitative Active Index % 24% 22% % 22% 31% % 22% 34% % 20% 36% % 20% 44% % 19% 47% % 18% 48% % 20% 49% % 19% 53% % 68% 2% Performance Commentary The CREF Stock Account return was 27.83% for the year ending December 31, 2013, lagging by 40 basis points the composite benchmark return of 28.23%. The Account trailed the benchmark in part due to fair value pricing adjustments. Underweight positions in Facebook and Korea Gas Corporation detracted slightly from relative performance. The Account s return was enhanced by overweight positions in electronics retailer Best Buy and two biotechnology firms, Gilead Sciences and Biogen Idec. Underweight positions in Brazilian beverage producer Ambev and Thai discount store chain operator Siam Makro aided performance. The Account had mixed results versus the benchmark, trailing in the three-, and ten-year periods by 57 and 28 basis points, respectively, and exceeding in the five-year period by 6 basis points.

22 CREF Stock Account Fund Characteristics Total Fund Assets Style Characteristics Capitalization Focus Level of Diversification Composition CREF Stock Account $126.5 billion Core Large Diversified U.S. Stocks 68.78% Non-U.S. Stocks Short term Invest (3-year) Market Risk (Beta) Number of Holdings 9,327 Turnover 57.0% Fees 0.49% Annually Portfolio Manager (tenure) Hans Erickson (17 years) William Riegel (14 years) Saira Malik (5 years) Thomas Franks (3 years)

23 CREF Stock Account Historical Returns CREF Stock Custom Stock * Return Return Rank Return Rank Difference % % Trailing 3-Year 12.5% % Trailing 5-Year Trailing 10-Year * 80% Dow Jones US Total Stock Market / 20% MSCI EAFE + Canada through June 30, % Russell 3000 / 25% MSCI EAFE + Canada / 6% MSCI Emerging Markets through December 31, % Russell 3000 / 30% MSCI ACWI ex-us Investable Market since January 1, Assessment The CREF Stock Account provides exposure to all major equity market segments, including large-, mid- and small-cap stocks, both domestically and within foreign developed and emerging markets. The Account utilizes a variety of management techniques, incorporating more active management than was employed in previous years. Relative underperformance over longer time periods is primarily due to fees. We recommend retention of this option.

24 CREF Growth Account Fund Objective and Investment Approach The CREF Growth Account, a variable annuity account, pursues a favorable long-term rate of return focused on capital appreciation provided by a diversified portfolio of common stocks that offer the opportunity for exceptional growth. The Account typically invests a minimum of 80% of its assets in common stocks and other equity securities, primarily in large, well-known, established companies, particularly those with new or innovative products, services or processes that may enhance future earnings prospects. The Account may also invest in smaller companies with higher growth potential as well as companies in new and emerging areas of the economy. In addition, the Account is permitted to invest in companies in order to benefit from prospective acquisitions, reorganizations or corporate restructurings. The Account may also invest a maximum of 20% of its assets in foreign securities. Performance Commentary The CREF Growth Account returned 35.00% in 2013, surpassing the Russell 1000 Growth Index return of 33.48% by 152 basis points on the strength of numerous successful stock selections. Among the largest positive contributions were overweight positions in biotechnology companies Celgene, Gilead Sciences and Biogen Idec. The Account also benefited from underweight holdings in IBM, Philip Morris International and Coca-Cola, all of which lagged for the period. Underweight investments in on-line travel service provider Priceline.com, pharmaceutical company Bristol-Myers Squibb and biotechnology firm Amgen detracted from relative performance. The Account also suffered from an out-of-benchmark position in Japan s Suntory Beverage & Food and an overweight in Internet-based travel company Expedia. The Account outperformed the benchmark by 9 basis points for the three-year period and trailed the Index by 42 and 31 basis points for the five- and ten-year periods, respectively. Fund Characteristics CREF Growth Account Total Fund Assets $19.4 billion Style Characteristics Growth Capitalization Focus Large Level of Diversification Diversified Market Risk (Beta) 1.05 (3-year) Number of Holdings 753 Turnover 67.0% Fees 0.46% Annually Portfolio Manager (tenure) Susan Hirsch (8 years) Andrea Mitroff (7 years)

25 CREF Growth Account Historical Returns CREF Growth Russell 1000 Growth Return Return Rank Return Rank Difference % % Trailing 3-Year 16.5% % Trailing 5-Year Trailing 10-Year Assessment The CREF Growth Account was terminated as an SMP investment option during July Eleven participants remain invested in the account.

26 CREF Equity Index Account Fund Objective and Investment Approach The CREF Equity Index Account, a variable annuity account, seeks a favorable long-term rate of return by utilizing a diversified portfolio constructed to track the overall market for common stocks publicly traded in the United States, as represented by a broad stock market index, the Russell 3000 Index. The Account approaches full replication of the benchmark index by purchasing most, but not necessarily all, of the securities in the benchmark index. The Account maintains holdings with proportional weightings across industries and sectors to create a portfolio to closely match the overall investment characteristics of the index. Performance Commentary The CREF Equity Index Account return of 32.99% lagged the Russell 300 Index benchmark return of 33.55% by 56 basis points, primarily due to the effect of expenses. For the year, all ten sectors of the Index scored double-digit gains, including seven that rose more than 25%. The Account benefited from participating in a securities lending program and had a risk profile similar to that of its benchmark. The Account s return includes a deduction for expenses, while the benchmark s does not. The Account underperformed the benchmark for the three-, five- and ten-year periods by 44, 45 and 42 basis points, respectively, as a result of fees. Fund Characteristics CREF Equity Index Account Total Fund Assets $15.9 billion Style Characteristics Core Capitalization Focus Large Level of Diversification Diversified Market Risk (Beta) 1.00 (3-year) Number of Holdings 2,977 Turnover 4.0% Fees 0.42% Annually Portfolio Manager (tenure) Jim Campagna (8 years) Anne Sapp (9 years)

27 CREF Equity Index Account Historical Returns CREF Equity Index Russell 3000 Index Return Return Rank Return Rank Difference % % Trailing 3-Year 15.8% % Trailing 5-Year Trailing 10-Year Assessment The CREF Equity Index Account is designed to track the Russell 3000 Index by utilizing a portfolio closely aligned with the overall investment characteristic of the Index. Annual underperformance is attributable to fees. We recommend retention of this option.

28 CREF Global Equities Account Fund Objective and Investment Approach The CREF Global Equities Account, a variable annuity account, strives to attain a favorable long-term rate of return through capital appreciation and income from a broadly diversified portfolio comprised primarily of foreign and domestic common stocks. The Account typically invests a minimum of 80% of its assets in equity securities of foreign and domestic companies. The Account utilizes a variety of investment strategies to pursue attractively priced companies, of any capitalization size, that management believes are undervalued based on the company s prospects for growth in earnings, cash flow, revenues and other relevant measures. Specific emphasis is placed on companies with shareholder-oriented management teams dedicated to creating shareholder value. Performance Commentary The CREF Global Equities Account return of 27.27% surpassed the MSCI World Index benchmark return of 26.68% by 59 basis points. The largest contributor was an overweight position in British online fashion retailer Asos. Overweights in biotechnology firm Gilead Sciences, Dutch coffee and tea produced D.E. Master Blenders 1753 and European Aeronautic Defence and Space, reorganized as Airbus Group, also boosted relative performance. Detracting from results were overweight holdings in two mining giants, Chile s Antofagasts and Britain s Rio Tinto. An underweight position in Facebook and an overweight in alcoholic-beverage maker Remy Cointreau also reduced returns slightly. The Account exceeded the benchmark for the three- and five-year periods by 13 and 70 basis points, respectively, and lagged in the ten-year period by 6 basis points. Fund Characteristics Total Fund Assets Composition CREF Global Equities Account $19.1 billion US Stocks 52.7% Non-U.S. Stocks 46.0 Cash (3-year) Market Risk (Beta) Number of Holdings 2,054 Turnover 70.0% Fees 0.53% Annually Portfolio Manager (tenure) Tom Franks (6 years) Tom Kolefas (8 years) Saira Malik (3 years) Andrea Mitroff (3 years) John Tribolet (7 years) The historical returns of this fund have been compared to a broad universe of competing funds beginning in 2013.

29 CREF Global Equities Account Historical Returns CREF Global Equities MSCI World Index Return Return Rank Return Rank Difference % 14.7% Trailing 3-Year 11.6% % Trailing 5-Year Trailing 10-Year Assessment The CREF Global Equities Account offers participants an actively-managed, diversified core equity investment option with low relative risk. The Account includes large-, mid- and smallcap common stocks across value, growth and core investment styles in global markets. The Account has experienced good relative performance, outpacing the benchmark return in six of the past ten years and over the three- and five-year time periods. We recommend retention of this option.

30 TIAA-CREF Large-Cap Growth Index Fund Fund Objective and Investment Approach The TIAA-CREF Large-Cap Growth Index Fund, a mutual fund, pursues a favorable long-term total return, focused on capital appreciation, by investing primarily in a portfolio of equity securities of large domestic growth companies based on the Russell 1000 Growth Index. The Fund typically invests a minimum of 80% of its assets in equity securities within its benchmark, the Russell 1000 Growth Index. The Fund buys most, but not necessarily all, of the stocks in its benchmark and strives to closely match the overall investment characteristics of the Russell 1000 Growth Index. The Fund uses a quantitative portfolio construction process to create and maintain a portfolio with similar proportional weightings across industries/sectors and individual securities as the Index. Performance Commentary The calendar year 2013 return of 33.17% for the TIAA-CREF Large-Cap Growth Index Fund lagged by 31 basis points the Russell 1000 Growth Index return of 33.48%. The Fund s relative underperformance was the result of fees. The impact of fees is anticipated to be less in future periods as a result of the Fund moving to a lower cost share class in the Self-Managed Plan in June The Fund trailed the benchmark for the three-, five- and ten-year periods by 34, 35 and 38 basis points, respectively. The Fund s relative performance is negatively affected by the deduction for fees and expenses since the benchmark s return has no fee and expense deduction. Fund Characteristics TIAA-CREF Large-Cap Growth Index Fund Total Fund Assets $1.6 billion Style Characteristics Growth Capitalization Focus Large Level of Diversification Diversified Market Risk (Beta) 1.00 (3-year) Number of Holdings 626 Turnover 24.0% Fees: Institutional Share Class 0.07% Annually Portfolio Manager (tenure) Jim Campagna (8 years) Anne Sapp (9 years)

31 TIAA-CREF Large-Cap Growth Index Fund Historical Returns TIAA-CREF Large-Cap Growth Index Fund Russell 1000 Growth Index Return Return Rank Return Rank Difference % % Trailing 3-Year 16.1% % Trailing 5-Year Trailing 10-Year Assessment The TIAA-CREF Large-Cap Growth Index Fund is a passively-managed mutual fund designed to replicate the Russell 1000 Growth Index. The Fund has performed in line with the Index, with annual underperformance attributable to fees. We recommend retention of this fund.