Retirement in the Twenty-First Century

Roger W. Ferguson Jr., president and chief executive officer of TIAA-CREF, joins Henny Sender, chief correspondent on international finance at the Financial Times, to discuss retirement reform, the current retirement landscape, and the state of TIAA-CREF's business. Ferguson begins by discussing the U.S. and global economy, identifying areas of growth and promise. Over the course of the conversation, he addresses ongoing challenges for U.S. retirees, the low personal savings rate in the country, and the factors driving the economic behavior of U.S. households and businesses.

The CEO Speaker series is a unique forum for leading global CEOs to share their insights on issues at the center of commerce and foreign policy and to discuss the changing role of business globally. The series is one way that CFR seeks to integrate perspectives from the business community into ongoing dialogues on pressing policy issues, such as the international economic recovery, sustainable growth and job creation, and the expanding reach and impact of technology.

SENDER: It is my great honor to chair this panel at the CFR. You all have the biographies of Roger Ferguson. And you can see that he has moved between the public and the private sector. And one of the reasons that I'm so thrilled to share the stage with him today is precisely because his career path has a certain consistency to it, and it is the belief that both public policy and the private sector can make the world a better place.

You will see that after all these years at the Fed and before that at McKinsey, he went to Swiss Re. I don't know how many of you are familiar with Swiss Re, but it is all about risk management and backstopping the financial system. And now he is at TIAA-CREF making the world and our retirement savings safer, as well.

So with that, I will start our discussion, and of course we will leave lots of time for questions and end promptly at nine. Usually I think it makes sense to go from the macro to the micro, but this time I am going to go from the micro to the macro and start out by asking Roger to tell us a little bit about TIAA-CREF and why he decided to join it.

FERGUSON: Great. Well, thank you very much and it's a pleasure to be here and to see friends of long standing. Sometimes people describe those as old friends. I think it's better to say friends of many years.

(LAUGHTER)

So it's nice to see all of you.

SO TIAA-CREF, it is not a household name to many, though to some it is essential to their retirement. We are a company that's been in existence since 1918.

SENDER: And we won't ask the audience if they know what it actually stands for.

FERGUSON: So I will tell you what it stands for. It stands for Teachers Insurance and Annuity Association, TIAA. And that company was started in 1918 here in New York by Andrew Carnegie and colleagues. And the second part of the name, CREF, stands for the College Retirement Equity Fund. The two organizations together provide for secure retirements for literally millions of Americans. We are the largest provider of retirement and financial security to folks in the not-for-profit sector.

To give you some numbers, because these things matter in New York, at the end of the first quarter, we had about $870 billion of assets under management. And administration now with markets up and down I think when I last looked at it, it was a bit over $900 billion.

The money is the retirement savings for literally millions of Americans, over 3, 3.5 million Americans, at about 15 or 16,000 institutions. And we have been evolving, we started off as a retirement company, as I've indicated, and now we offer a range of financial services, including mutual funds and life insurance, but all aimed at the financial well-being and financial security of Americans who are serving others. So that's the long and the short of TIAA-CREF.

SENDER: These are — it's a very interesting time in the markets today. Obviously we've seen the volatility pick up hugely in the bond market. And after a long period in which equities and bonds were not co-related, they seem to be coming more and more co-related.

Can you talk to us a bit about what your assumptions are about how smoothly or with how much difficulty the markets will have absorbing a hike in interest rates? To what extent will there be another taper tantrum? What markets will be most affected?

FERGUSON: Sure, I'd be happy to. Recognize that all this is obviously in the realm of speculation because no one really knows for sure.

I tend to be relatively optimistic on the question of the so-called taper tantrum. I think the Federal Reserve has been very clear, as clear as a group of that large a number can be about what their intentions are, which is to sort of gradually raise rates as they see the incoming data suggest that the economy can support that.

And so given that degree of transparency, I think they've done what they can do. The volatility I think will come because the data themselves will be internally inconsistent. There will be things that are pretty warm, if you will, some things that are a little cool.

We've recently seen, as a couple of days ago, something called the jolt state of data about the labor force, the labor market that suggests strength. There will be other things that might suggest weakness. So I would expect some volatility, not because the Fed is going to be surprising, but rather because the data themselves are not all going to point in one direction.

I think the other reason there might be some volatility, frankly, is that there is asynchronous movements in — in monetary policy. The Fed looks like it's, you know, poised for lift-off. We'll put it that way. Some other banks are clearly still in the mode of thinking about so-called quantitative easing. And so I think that will create some discontinuities.

And then the final thing obviously is all of this is against the backdrop of geopolitical changes, uncertainties, where here in the face of Richard Haass I dare not speak to these important topics of how the geopolitical situation will unfold, but it certainly will spill over into markets and market expectations. So not totally smooth, but due to external factors, not an absence of clarity on the part of the Fed.

SENDER: You know, you spoke to the inconsistency of the data. So on the labor front, the numbers have been quite encouraging and yet you look at retail sales and we see the worst numbers since 2009.

You know, why do we see these inconsistencies and how concerned are you about them?

FERGUSON: Well, OK, again I think we see inconsistencies because there are a range of forces affecting both households and businesses. So for households, for example, for some they have jobs that are paying quite well. Others have jobs that aren't paying what they'd hoped. We know from the data that there are some folks who are working part-time who'd want to work full-time.

And then there's always the question of those who are on the fringe of the labor force ready to get back in. So one headline number masks three or four different stories at a household level.

The second issue obviously is there's still some households that are deleveraging. We saw some headlines the other day about defaults rising again in home equity lines of credit, for example. And so individual households are in different situations. Those who have been lucky enough to have pretty big exposures to the equity markets have been enjoying quite a rally, but not everyone has been doing that.

And there's also inconsistency at the corporate level. Companies that have big revenue exposures from overseas are being influenced by movements in exchange rates, for example. And so it shouldn't be a surprise that we see many different stories under the surface because, in fact, households and businesses are in various different situations as we go into what looks like a potential change in the stance of monetary policy.

SENDER: There are some people who say that such low interest rates and the asset price inflation, particularly in the stock market, have given companies more of an incentive to engage in financial engineering and shared buybacks rather than either investing in labor or capital and equipment.

Do you share those concerns?

FERGUSON: Well, let's talk about what the facts are and the facts are indeed that what's called business-fixed investment, business investment in capital has been relatively subdued for sure. We have absolutely seen businesses adding to their workforce. So I would say folks are, businesses are investing, if you will, in labor to some degree.

But I would say both cases have been moderately subdued and I think that has to do with the point you raised earlier, which is so-called top line growth, revenue growth, has been surprisingly slow for many businesses. And so in order to get so-called bottom line growth, they have been very, very focused in on managing expenses very, very closely.

The second thing that's occurred, I believe, is with interest rates being so low, there's no doubt that businesses have been taking this ample liquidity that's in the marketplace, figuring out how to overcome flat revenue growth, and one of the answers has been doing corporate transactions and the other has been stock buyback in order to create so-called total shareholder return at a point when, you know, revenue expansion has been hard to come by.

So you put it all together and you say, well, it's not surprising. And it all goes back to the earlier point that you made, which is that in a consumer-driven economy, which we are, 66, 70 percent of GDP is around consumption, when consumption is growing relatively slowly and the expectation for shareholders is an increase in return quarter over quarter, businesses are looking for ways to do that and they're using these various techniques that you've talked about.

SENDER: You know, there is a debate and one of the big sponsors of the debate about corporate governance is McKinsey. And there's been a lot of concern about whether asset managers and investors in general are too short-term. Do you share those concerns? What do you do about that?

CEOs constantly say, when we tell shareholders we're investing for the long-term, and you know maybe for the next year, two, three, our earnings will be depressed, shareholders say goodbye, see you in three years.

FERGUSON: Well, there — we should be cautious. There are a range of shareholders. First, I must admit, when you started this sentence about institutions being interested in corporate governance, I thought you were going to talk about TIAA-CREF, not my former partners at McKinsey.

(LAUGHTER)

So one of the things I didn't say is that we at TIAA-CREF, if I can...

SENDER: Please.

FERGUSON: ... remind folks of this, have had a long history in being very interested in topics of corporate governance. We're probably one of the few large asset managers that has an entire staff around corporate governance matters.

SENDER: And of course we told the audience that this is a non-profit organization.

FERGUSON: And we are a non-profit organization, yes.

So to answer your question, I think there are — I've observed a bifurcation, if we will. Actually there are three different groups now I think in asset management. There are those such as my company that think of themselves as long-term investors. We are very interested in active engagement with — with management. We are eager to have the best of corporate governance, and so we've been supportive of things such as stay on pay, et cetera.

And we believe that we are in it for the long term. And so consequently we think engagement is the right way for us to drive shareholder value.

Then there's also the asset class now known as activist investors. That group is interested, I think, in relatively quick, short-term returns, driving for increase in dividends, corporate restructuring, et cetera. But all it seems with the desire to get big outsized returns in short periods of time.

One of the things I've observed is that many big institutional investors are now swinging in the direction that we have been advocating for a long time. And so we see other major asset management companies who are long-term investors starting to get more involved in the kind of engagement that we're talking about, wanting to hear from CEOs about what their strategy is, wanting to talk to boards of directors.

And so I think there's quite an evolution going on in asset management between those that are very, very short-term and driving for quick returns, and those such as myself, our company, that are interested in longer-term engagement for long-term execution of strategies that will drive long-term shareholder returns.

SENDER: Another of Roger's former employers, Swiss Re, put out a report at the end of March that talks about the long-term costs of QE and zero interest rates for pension funds, insurance companies, and savers. And it came up with two data points, one of which is that these low-yield (inaudible) savers in the U.S. have been deprived of almost $500 billion in foregone interest and insurance companies in the U.S. and Europe have been starved of $400 billion.

So now we're segueing into the thing that concerns so many of us in the room. You know, how alarmed should we be about the fact that most pension funds are actually receiving far lower returns than what they need?

FERGUSON: I would say the degree of alarm should be moderate. And the reason that I'm not one ringing the bell for dramatic alarm is that when you look at, at least, if I could use the word, the better-run pension funds, I want to be cautious not to suggest that others aren't well-run, but in my own company, for example, what we see is we have a very diversified portfolio that backstops people's retirement.

And so, yes, the fixed-income part of the portfolio is relatively flat. There's what's called reinvestment risk. You know, the risk of getting — maturing fixed-income assets being reinvested at lower rates. Absolutely a risk on the downside.

But two other things happen when you have a very low interest rate environment, as we do now. One is that equities continue to do well. And so a broadly diversified portfolio will have some positive energy in that space.

The second, and we are very large in these spaces, private equity and real estate investments have also been doing quite well against a slow interest rate environment. And so we see that we're getting in our private equity portfolios what's called exits (ph), you know, private equity returns that are being sold to others at a very nice profit. And the other thing that happens when you...

SENDER: Do you fear that that's coming to an end now? We've seen so many sales and they keep going lower and lower in the barrel.

FERGUSON: I think for sure it will start to taper over time, having to do with what's called vantages (ph) of private equity investment. So for sure that will start to taper.

The other thing that we see in the low interest rate environment is that actually also has been from a corporate standpoint at low default environment. And so insofar as pension funds are large holders of corporate fixed-income securities, their default experience has actually been better.

And so if you've been following what I've been saying, it's really a mixed story. It's not all about low interest rates being negative. There are some positives that emerge out of this kind of — kind of setting of interest rates.

SENDER: You know, in February of 2014, Jeremy Stein, then leaving the Fed, warned about a bubble in corporate credit. Are you concerned about that?

FERGUSON: I'm pretty sure that what is happening, and this is not surprising with low interest rates, is that at the margin, there probably are some corporate credits out there that as interest rates returned to normal may prove to be mispriced . I think it's a little dangerous to go to bubble. That seems to me that that's — it's premature to — to hit that alarm.

But one always has to do — (inaudible) do what we do, very good fundamental underwriting to choose the better credits from the not so good credits. The other thing they want us to do is think about this over the cycle and understand how some of these companies might fare when interest rates start to normalize if, in fact, that may have an impact on overall macro situation.

SENDER: You know, in referring to the reinvestment risk in the low yield in the fixed-income market today, people seem to think that we've all learned the lessons of 1998 or 2007 and there isn't much leverage around. Do you share those optimistic conclusions?

FERGUSON: One of the things I've observed, being interested in and following markets now for 40 years, I never thought I'd get to the stage in my life where I would talk about, oh, with all the years of experience I have in these things, but having been watching markets literally since the mid-70s, I think we learn and forget lessons. New people come in, external circumstances drive things.

And the reason I say it that way is I am sure there will be pockets of mispriced assets that emerge when you have low interest rates. Don't know quite where they are yet, no one really does. And so for sure what will happen is I think many of us will try to avoid all the mistakes that we've seen others make in the past. That does not mean that everything is going to be perfect going forward because there will be new imbalances, new mistakes, new misperceptions.

So I want to be a little balanced, if I could. I don't think that we're necessarily heading for another big crisis in any sense. I'm not in that view whatsoever. But I'm also pretty sure there will be places where in hindsight people will say, gee, that investment was mispriced and we wish we hadn't gotten into it.

But I would also say that's in some sense not surprising. That is simply the way markets work all the time.

SENDER: How vulnerable are emerging markets, do you think? We saw in the taper tantrum exactly two years ago that they were far more vulnerable. And since then, you know, the leverage has built up in emerging markets and a lot of that is dollar debt. And we've referred to the strong dollar already.

FERGUSON: So I think there are a range of stories in emerging markets. There are some that have done structural reform, that have a flexibility in labor markets, capital markets, et cetera. There are a number that have built up large reserves, having learned their lessons from the crises of '97, '98.

There are others that are large economies that are falling into recession. So I think it's the story of picking very carefully what the emerging markets might look like. Right now there's a great deal of concern that's emerged about some but not all markets. And I think again, similar to the corporate story, don't want to paint with too big a brush. You want to be very surgical and recognize which of these economies really manages themselves well and which ones are likely to be vulnerable as the Euro (ph) curve starts to return to a normal shape and normal level.

SENDER: Yeah. Let's drill down now on the whole retirement finance and funding situation.

Yesterday Rob Reynolds, who runs Putnam, called for a whole rethink on savings and tax policies. A lot of studies have concluded that social security will not be able to meet all its obligations by 2020.

Do you think we have enough incentives in place, you know, to encourage savings? Do we have the right policies in place or are we going to have some sort of crisis?

FERGUSON: Look, that's really big question. So I think we should parse it. When it comes to social security, you're right, the trustees have already said that I think it's 2033 but the number moves around a little bit, they'll only be able to pay about 75 percent of the expected payouts.

And I think there there's a bit of frustration and a bit of good news. The good news is most economists would share a consensus about how to fix social security. Our politicians are having trouble reaching to that consensus. So that's one where I think it's sort of the solution is within our grasp if we really reach it, if you will. And so there I think there's something that can be done. Will it be done? Do we have the political will, is a different question.

Second part of the question is around private savings. There's no question that private savings have been too low for too long. This predates the current macro situation. There have been studies from the U.S. Senate that shows that we may be — miss (ph) savings by several trillion dollars. My own company has done a survey that shows that a majority of Americans are concerned, about 50 percent of Americans are concerned that they won't have ample savings for their retirements. I think there's some reason for that concern.

So I think that is a longer-term problem. And the answer to that is whatever age we may be, old, young, whatever, we need to save more. And for those who can do it, we need to be prepared for longer working lives. And so we as individuals have to fix what we can.

The final point I think is whether or not there are ample incentives to save. I think there are right now. The savings in 403bs, which is what we run, 401ks, IRs (ph), all of that, have a certain sort of tax deferral around them. The issue...

SENDER: Is that enough?

FERGUSON: Well, it's what we have. Is it enough? The answer is not necessarily, but it's a combination of public policy and private action. And so it's not just simply gee, are we doing enough? There's a lot, we haven't, as I said, saved enough, even with the current saving (ph) standards.

Is the political situation set up to do more in the way of incentives to save? I think it's a tough call right now because we also have to think about the fiscal situation. And so I suspect over time we aren't going to get more in the way of incentives to save, but it's up to all of us to leverage fully sort of what we have.

The final point is, and I don't want to drill too deep because it's sort of technical, but the nature of the products that are out there allowing us to save I think should evolve so that it's not all about savings, but it's also about the payout in retirement. Because people tend to be very focused in on how big is my asset accumulation and they ignore what does this look like when it comes to the actual payout in retirement. And the products that we have now I think do not encourage folks to think about that second question.

SENDER: You know, are there countries in the world that could serve as role models? Has anyone done a better job?

FERGUSON: There are pockets where there is some strength. Australia has, for example, what they call a superannuation system that requires that everyone save a certain amount, but also that they save in the form that allows them to have annuities.

If I can again do a small ad for my company, I actually think that the model that we embody is a great model for America, right. So we get folks all saving and many of our clients they have what's called automatic enrollment, which means everyone is enrolled in a savings plan.

The second thing that makes our system work quite well is that there are employer and employee matches. So the employee puts something in, the employer puts something in.

And the third thing that makes our system work really well and one of my predecessors, John Biggs, is here, he understands this quite well, for TIAA we give people fixed annuity, which gives them guaranteed income for life that's fixed, and then the CREF part of our organization provides what's called variable annuities that are — have a nice inflation hedge to them.

And so if I can be immodest, one doesn't have to look offshore to find a model of how to do this. In fact, you know, the history of my company is — is exactly I think a very, very good model for how one could do this.

SENDER: Thank you. I'm going to open the floor to questions. I want to remind all of you that this is on the record. Please identify yourself and your affiliation. And there are microphones everywhere.

Hari (ph), I'll start with you.

FERGUSON: And there are hands everywhere as well.

QUESTION:  Increasingly recently, the volatility in markets is all being attributed to a dramatic decline in liquidity of markets. So as a former policy maker, regulator, I have a three-part question. Number one, do you buy the reason (ph) being attributed to this illiquidity, in fact the main reason being attributed as changes in regulatory reforms such as emasculated (ph) bank balance sheets?

Secondly, as a large prudential steward of a trillion dollars of assets, are you worried about this increasing illiquidity?

And thirdly, what do you — what do you think we should do about it?

FERGUSON: OK, so...

SENDER: Great question.

FERGUSON: Great three questions.

(LAUGHTER)

So question one, I think there is some anecdotal evidence that there's an absence of liquidity or decline in liquidity — absence is a strong word. A decline in liquidity. I think there's anecdotal evidence to support that. I hear it even from some portfolio managers in other investors. And so I — I have reason to believe that's probably true.

You probably saw the report the other day around — in equity markets, trading moving to certain hours, even half-hour fractions, et cetera, towards the end of the day. And hard to get trades off in other parts of the day. So studies are suggesting some concerns about liquidity, both in fixed income and in equity markets.

So yes, I think some of that has occurred.

Secondly, I think it is associated to some degree, though I don't think we know how much yet, with some changes in regulation that have taken some financial services firms to the position where they don't want to hold large inventories and aren't being the backstop. But there have been other changes, as well, for a long, long time. As you know, in market making and equity markets as well. So I don't want to say it's all about the most recent regulatory changes, but there is some — some of that.

The third point, what to do about, what I find interesting in markets is I suspect there will be over time a self-correction here. There's money to be made in providing liquidity. There's money to be made in being a market-maker, if you're willing to build the inventory. And I suspect over time there will be new players, maybe hedge funds, maybe others, that will crop (ph) up.

And certainly for very large institutional investors, there are opportunities to do trading. Again, it may be off markets, to some degree, in order to find that kind of liquidity. And so, am I worried about it? To some degree. And I think we just have to watch and see whether or not the optimistic story of new players and new trading vehicles emerging overcomes what looks like, at this moment, a decline in the degree of liquidity.

SENDER: Could I just pick up on that? And ask you whether trading vehicles might not potentially make the problem worse? So for example, if you look at leverage loan ETFs, a leverage loan historically takes well over 20 days to settle and yet these ETFs are promising instant liquidity. So how do you reconcile these things?

FERGUSON: Yes, so this is I think a very important question, which is we have to be careful that financial engineering is, as you just suggested, really reflective of the underlying asset class. And so I would have a little bit of concern that some of these new vehicles that are starting to emerge out there aren't really reflective of the asset class that is underlying it and, back to your earlier point, as liquidity — well, as interest rates start to rise, we may find that this is an example of the point I was making, there will be some types of investments or assets that have emerged that won't withstand the changes.

And so there's a lot of financial engineering that occurs when money is free or cheap, that when money returns to normal pricing, it will prove not to be wise. And that might well be, I'm not sure, but one might think of that kind of thing as a potential example.

SENDER: Thank you.

Just right here?

QUESTION: Thank you. Back to your introduction about your career in public private balance and so on. Given, you know, libertarian kind of flavoring of the society of the moment, and particularly denigration of government, could you just speak a little bit about your view of the sort of current ratio of public-private? What is the optimum relationship at the moment, would you say?

FERGUSON: Well, that's a really big question.

(LAUGHTER)

Wow. So let me start — so when all else fails I put on my academic hat and think about what do the first principles of economics tell us about these things. So what does economics tell us? Economics tells us that government should do and should rise when there's a pure — pure public good kind of problem, if you know what I mean. So the point of government is actually to help us — how can I describe this? — think about all these externalities where we affect each other and the government basically sets the rules of how those transactions should take place, I think is one way to think about it.

So why do we need government? We need government to do things that are broad, pure public goods, such as defense, but also things such as social security. And so I would say let's focus on having the right balance of, gee, there are public goods here but only the government can provide the answer, and then we let the private markets work where they can.

I also think on the question of public-private, libertarian, too much, too little, one of the things that we've certainly discovered is that having, though it's controversial, we need often a big government backstop when things really get out of kilter. And so, you know, are we at the right place, public-private balance? I don't really know. I don't think anyone does. And you never really know until things swing one way or the other and then you wish, boy, wouldn't it be nice if we had more rules and a stronger government, and then when things return to normal you say, oh, gee, too much government, fewer rules. And that pendulum just swings back and forth.

And I think that's — that's really what goes on in society and that's what's happening right now.

I'm sorry that's not a more articulate, insightful answer, but in honesty I'm not sure anyone other than Richard Haass has a better answer.

(LAUGHTER)

SENDER: I'll take a question back there. You had your hand up first.

QUESTION: Hi, Roger. You called attention to the performance, the good performance of a couple of alternative asset classes in your mix, private equity and real estate, in particular.

As the world of sort of corporate or employer-based retirement savings shifts gradually or perhaps not so gradually from DB plans to DC, defined contribution plans, and within that, as target date plans become increasingly important ways to express DC plan savings, is there scope for alternative asset classes in that mix? And how as a practical matter — first of all, is it a good thing? Does it in fact help to insulate against kind of systematic market risk and drawdowns such as we saw in the financial crisis, et cetera?

And what would some of the liquidity and other design (ph) considerations be around those — those products?

FERGUSON: All right, so I think in any well-defined, well-designed pension scheme, you need to have the full range of asset classes for the reason that you just pointed out. So some of them are short-term, meant to be very, very liquid. And that is an important backstop. But the secret of a pension plan is it is really long-term investing where the biggest risk, frankly, for most pension plans is inflation.

And so you need asset classes that have a good inflation hedge characteristic to them. You need asset classes that can take care of getting liquidity premium (ph), if you will. And so similar to what we run, I think having a well-diversified portfolio is very important.

One of the things I didn't talk about is we are the second largest manager of real estate, for example. We have a very unusual, actually unique account called the real estate separate account that gives our retirees, our savers and retirees a chance to get direct exposure to corporate real estate, to commercial real estate grade A, class A kind of real estate. That's a very successful account for us. And the fact that it's successful suggests that really smart investors, and we tend to deal with folks in the higher ed sector who are, generally speaking, well educated individuals, recognize that having a balanced portfolio that includes those alternative classes is very important.

The challenge around them is to think of three things. One is they do have different liquidity features, and so one has to be careful. Secondly, they have different risk profiles. And — and different cycles. And so one should invest based on your own personal risk exposure and risk appetite. But given those two things, I think it's good to have both — many classes.

The final point I'd make is in all cases, fees have got to be relatively low, consistent with what's called for to run the asset class so that your savings aren't being eaten up by excessive fees. So one of the things I'm really proud of for our organization is our mutual funds, the TIAA-CREF mutual funds are lower quartile (ph), in some cases lower decile (ph) fees.

And one of our trustees, Bridget Macaskill, is here, and one of her jobs is to work with us to make sure that we keep our fees appropriate for the investments that we're presenting. OK.

SENDER: Yes?

QUESTION: Good morning. You may have seen what Paul Volcker through the Volcker Alliance had to say about the lack of safety and soundness and accountability about state and municipal pension funds and the retirees and future retirees.

What — what's your view on that impending crisis or critical issue?

FERGUSON: Look, I would say it's absolutely a critical issue. And it wasn't just Paul Volcker's recognized it. If you go around to many states, this issue of pension reform is a front burner issue. The challenge, I think, is to figure out what the solution space might be. From my perspective, I think a good model exists in the state of Rhode Island. It was sort of contentious. There were lawsuits associated with it. And we can't pretend that that was not the case. But the program they've developed is one that has a nice combination of the best of DB and DC, if you will. So it requires more individual savings from the individual employer, the individual employee, I'm sorry. But it gives, within the plan, the opportunity not just to save but to do that other thing I've talked about, which is to have a good, predictable payout.

And so from my standpoint the question is not whether or not state plans are under — and municipal plans are under some stress. I think that varies from state to state, but it's pretty public. I think the real challenge is what do you do and how do you progress from a plan that may not be sustainable to one that is sustainable? And I look to the Rhode Island model as being, in some sense, a solid model because it has the best of both the DC and the DB world, but getting there was absolutely contentious and involved some lawsuits.

So that's the way I think about it and I think what Paul — what Chairman Volcker's pointed out is — is well known in many, many states already.

SENDER: Will we see many more situations where bondholders are pitted against retirees and pension beneficiaries, as we saw in Detroit?

FERGUSON: Well, that's a hard question to answer. I think the answer is potentially yes. And the challenge obviously is (inaudible) in states have just a limited pool of resources to draw from and they've made big promises to both bondholders, retirees, and others, and they also have to take care of just the day-to-day managing of cities.

And so I think this is just a reflection of a fundamental thing that's occurred in America, which is demographics. The reason we are talking about all of this is that we have an aging population and so all these social plans that were put in place make an awful lot of sense, but as all of us baby boomers retire, we're putting more and more stress on the system, just as nothing else is let go. So we have to deal with aging baby boomers, we have to deal with infrastructure, we have to worry about education for young people, healthcare costs. And many of those things run through not just federal programs but also through state programs.

And so I think we are, because of the aging baby boomers, confronting a number of very, very tough tradeoffs that will pit, as you say, one group versus another over time.

SENDER: Thank you. Lots more questions. Yes?

FERGUSON: Why don't you wait for the microphone?

QUESTION: Roger, I'd like to return to the subject of activism and the distinction that you were drawing between the perspective of the short-term investors and long-term investors. Obviously today activism is an increasingly prominent phenomenon and a preoccupation of boards of public companies, including the most successful public companies.

Recently Larry Fink has been quite critical of the phenomenon of activism and pointed out the risks of shortchanging, if you will, perspective on longer-term opportunities because of the need to drive short-term results. And I'd be interested if you had any thoughts on his comments.

FERGUSON: Well, I won't speak to Larry's comments per se, I'll speak to the broader issue, which is we firmly believe that long-term investors, including the ones that — including us, have a real interest and obligation in engaging with management, not necessarily publicly, maybe privately, to understand exactly what the strategy is, how it's being executed, what the metrics of success are going to be.

We all have an interest in making sure the compensation systems are structured with the right set of incentives. There's no question of that. That may well mean that earnings per share growth from quarter to quarter may not be smooth. And so we have to recognize that as long-term investors.

But the real secret I think is that long-term investors and management have an alignment of interest around getting really smart strategies well executed over a reasonable period of time. And — and so I'm firmly in the camp that says, as we are, a big institutional investor that's in it for the long haul has the right and the obligation to engage with management on what they are — what they're doing.

I also think that big institutional investors have the right and the obligation, to some degree, to engage not just with management but also with selected members of the board. And I emphasize selected — so the independent lead director the chairman. Perhaps occasionally the head of the comp committee.

And so I think there is absolutely the right, the desire, and I'd say the obligation for long-term investors to understand the strategy, see how it's being executed, and engage with both management and, as need be, occasionally directors who are, after all, our representatives.

SENDER: In that corner?

QUESTION: Roger, I wanted to ask you about higher ed, one of the major markets or stewarded industries for your company.

It's an unusual situation, of course, because at one extreme you've got tenured professors who have been in TIAA-CREF all their lives and their institutions have invested for them. And whether they retire or not doesn't always or even perhaps usually depend on the size of their funds. They're usually pretty well placed. There are other reasons they consider.

But at the beginning end of the spectrum, we have more and more people who are being hired as adjuncts or instructors, traveling team going from one university to another. I would just be interested to know, do you have a sense of how many institutions in this country provide TIAA-CREF for those people? Because of course they could take the accounts from one institution to another. But if they don't have any retirement support at all, they're going to be in real trouble.

What do you think the situation is?

FERGUSON: Well, Nan (ph), I think you put your finger on one of the most important and as you know one of the most contentious issues in higher ed right now. And so to be very clear, as far as I can tell, most adjuncts are not benefit-eligible. And I think that is a big challenge for higher ed right now. For those who don't know, Nan (ph) has been the leader of major institutions in America, including Duke, and really understands this as well as anybody.

So I think we are going to have to — those in higher ed, the leadership, come to grips with this issue of how to deal with this group of adjuncts. Not clear to me what the answer is going to be. It goes back to one of the points we were making earlier, which is there are sort of constant tradeoffs that are being made here. But I think it's going to be very, very difficult to maintain the current situation indefinitely. What the solution's going to be is going to vary from — from place to place, from university to university, et cetera. And so I think this is one way the film is gradually being developed and unfolding. We'll just have to watch and see how your colleagues who are at the top of the higher ed think about doing this.

But there's no doubt that the demographics and the changes on campuses could be very profound. And I think it is going to be very important for us to figure out what the solutions are around the space of benefits.

SENDER: Nan (ph), given the importance of the subject, I wanted to know if you wanted to have any follow-up comment or question? Or is that fine?

QUESTION: That's basically very good. I would just underscore what you said — it is a significant problem. And since TIAA-CREF is ingenious in many ways, and they could take those accounts with them, I would hope that you would see this as a market where you might persuade more of leaders in higher education to see their collective benefit in making sure these folks are not going to be in penury when they finish their academic careers.

FERGUSON: But it — this is one of those things that is also sort of a joint responsibility. So part of the challenge is do the institutions offer our program or a program? The second is do the individuals have the wherewithal to take it up? And this goes into an entire different dimension of the life of the folks in that space. How many of them are doing this because they are senior and have plenty other resources, there are a few. Then you have others at the other end who are just getting out of graduate school and they're having trouble finding that full-time job and they're cobbling together an existence by putting together three or four of these kinds of part-time roles.

And so the demographics in the population are quite different, but you — I think the major point is we should all think about retirement as a shared responsibility between the employer and the employee. The employer offering the right kinds of plans, then the employees enrolling in and taking advantage of those plans to the max. And so I think this is one that is still sort of evolving and it's really, as you know, contentious and very, very difficult.

SENDER: Thank you.

Yes?

Sorry, gray shirt, you had your hand up a long time. Thank you for your patience.

QUESTION: Very happy member of TIAA for many years. The last questions, let me push that a little further because it's just the tip of the iceberg. We're beginning to confront what has been an obvious reality for a long time. A large segment of people in our society do not have enough money to deal with their retirement, and many don't have any savings at all. And we're beginning to realize that this is not likely to change in the near, even the mid-term future, and this affects their children and the whole — multi generations.

What do you think are the social options, what options does our society have to deal with a very large number of people who will not be able to, under any circumstances, deal with their own — their own retirement?

FERGUSON: So this goes back to one of the earlier points. We have to understand that we have a bedrock plan here for everybody called social security. So the first thing I think we have to do is respond to what the trustees have said, which is that if we aren't careful and don't make changes, social security will only be able to pay out 75 percent of the expected benefits. That has got to be item one to fix because that is the bedrock for all those folks that you're talking about.

Item two is for those who can do it, and I emphasize those who can, and it's maybe not a large group but the middle income part of the group that you're talking about, if they can save a bit more even now I think that's important. So we have to continue that path.

Again, for those who can, let's recognize that the so-called retirement that we are going to have is quite different from that of our grandparents. And so all of us, I think, many of us who can do it will be working a little longer.

Now whenever I say that, I am always reminded by a lot of my friends that there are folks in tough, blue-collar and pink-collar jobs where saying extend your working life may not be doable, so we have to be sort of quite mindful of that as well. But I think it all starts with let's put the basic social safety net plans that we have in place now — social security, Medicare, Medicaid, on a more sustainable footing because if we don't do that, then the folks you're talking about will have even less of a chance of having a dignified kind of retirement.

And then let's think about, for those who can, working a little longer because I think that's — that's really got to be part of the solution space now. I realize that's always going to leave some folks without a satisfactory answer, and I think that is for sure a big challenge that you're putting your finger on. We can fix the things that we can fix and hope that that covers most people. And social security is meant to try to be at least sufficient to get people above the poverty line.

You have to remember that before the so-called great society, before Lyndon Johnson created Medicare and Medicaid, the largest single group of people living in poverty were older people, retirees. Fortunately because of the combination of social security, Medicare, and Medicaid, that's no longer the case. And so we really have to shore up those programs if we're going to make sure that older folks are avoiding this real issue of poverty as they get into old age.

SENDER: Well, let me pick up on that and ask you a much larger question, you know, which no one has any definitive answer on. And that's this...

(LAUGHTER)

... your point about, you know, manufacturing workers just don't have the option to keep working. I mean, historically the way to a middle class and relatively high standard of living for unskilled workers was through manufacturing. Through the combination of technology and globalization, whether you're sitting in (inaudible) or Delhi (ph) or Detroit, this is going to be a big challenge.

I mean, how much worse can — can the situation be, given that employment challenge and that the growth of service jobs tends to be very poor quality, lower end jobs?

FERGUSON: I'm glad you opened your question by saying no one has a definitive answer to it.

(LAUGHTER)

So let me just reinforce the points that you've made and I hope put it in the broader context. There's no doubt that we are confronting now, through the combination of technology, globalization, and aging population, a challenging mix, no doubt about it.

So we do have to confront and fix what we can, which is why I've talked about social security and other things. And we're going to have to find solutions that work for each pocket of individuals as best we can.

I think the other thing you have to recognize, though, is that our society is going through one of those sea changes that has occurred only a few times in the past. And we have to be a little optimistic but also realistic about it. So the last time something like this happened was when we moved from an agrarian society to an industrial society. And there were huge dislocations. And now we're moving from an industrial society to whatever one wants to call it, post-industrial society, I'm not sure what the phrase is going to be. And so we have to figure out how to leverage the things that have been weaknesses into strengths.

So is there a way that technology can be used to increase productivity, for example? Because the way out of this for society is to have increased productivity for those who are at work, allowing society overall to have a bigger GDP if you will, that then allows them to support the working-age folks, our children, support us as we get older. Technology may allow all of us to work just a little longer. And so that's — that is sort of the path forward.

Now easier said than done. And there are lots of very, very smart people working on this. I was at a program at Harvard business school the other day on exactly that set of topics. Not that we came up with solutions, but at least the good news is many, many folks are confronting this. And if you're at all optimistic about the creativity of our society, as I am, I think one could at least hope that we'll start to get solutions here before this becomes really a crisis for us.

SENDER: Thank you.

Next question, yes?

QUESTION: Thank you. You spoke a bit about your organization's work in the field of active engagement with management in the field of corporate governance.

There's also a growing debate around shareholder engagement on the issues of environmental and social positive and negative externalities and engagement in that area. And the debate is the extent to which this may add to shareholder value or detract from it, both traditional measures of shareholder value and risk. I wonder what work your organization is doing, perhaps through its engagement efforts on social and environmental costs?

FERGUSON: OK. Well, a couple of points I'd make. One is we have one of the largest social — and oldest socially screened investment choices for both CREF and then our mutual funds. And so we're certainly giving our participants the option of — of using socially screened — social screens in order to drive their investment. So that's giving folks that choice.

Secondly, we are actually engaging, we have historically engaged with many of our companies around this issue of sustainability, for example. The first thing that we want to see is more transparency. And so you've probably seen over the last several years, not just because of our efforts, but many efforts that many companies are issuing sustainability reports talking about their carbon footprint, how their programs are working. We've seen a number of institutions thinking much more about their supply chain and whether or not they can drive what their suppliers are doing to be much more sustainable.

And so I think that's a very, very important step forward. Undoubtedly there's more that we could and all could do. The final point I'd make is very much your point. This is about long-term inter-generational risk management, if you will. And so I think putting it in that context makes it very credible and appropriate for investors to be talking about it because over time returns will start to degrade if one is not thinking more broadly about just this whole range of issues.

So I think it's absolutely an appropriate set of conversations we've been engaging on it. And the first step I think is absolutely get greater transparency. We're also seeing many management teams going past that to actually changing some of their practices.

SENDER: Thank you. Next question, please make it short. At that table, thank you.

QUESTION: Thanks. Hi, Roger. Roger, you talked about short-term versus long-term investment and active engagement with management. In addition to that, are there any public policy changes — there have been suggestions of extending the capital gains holding period — that you would support?

FERGUSON: All right. This is the danger of having so many really smart friends of many, many years coming, you know. The hardest questions I've gotten are from people I've known for at least 20 or 30 years.

Rachel (ph), that's a really good one. I have to say I'm not 100 percent certain because the truth of the matter is I think things such as capital gains holding period may really be part of it, for sure. But that runs right into the midst of all the fiscal questions, so I'm going to have to, if you don't mind, take a gradual punt on that one. Because the truth of the matter is it doesn't come to mind immediately what one should be doing as a public policy matter.

I think what does come to mind, frankly, is what is already starting to happen, which is the shareholders themselves, the class of investors changing what they do. Because at the end of the day, it's what the shareholders demand from management, that's what we get. So if what you're going to demand is earnings per share growth every quarter, that's what management's going to do. If you're going to engage with them around long-term questions, then that's what you're going to do.

And so now that I'm back in the private sector, I say first to answer your question is just figure out what the private sector can do initially and then we can go and sort of have conversations about what public policy might do.

I sort of tried to get a decent answer out of not having a really good one.

(LAUGHTER)

SENDER: One 30-second final question. Anyone brave enough? Thank you.

QUESTION: Hi. Can you speak to the structure of 401ks and the idea that we ask individuals without necessarily a lot of financial training to choose their own portfolio, is it a sound system and are there reforms you'd suggest?

FERGUSON: So, look, I think the 401k was always meant to be a supplementary system in a world in which there were DB plans and it's evolved to being the major retirement system. A couple of facts — we've done some surveys, we see that about half of Americans are concerned about not having enough money to retire. 40 percent of them don't even understand what their options are.

And so I think as a group we really have to rethink the 401k system. It has a couple of weaknesses that you've pointed out. One is it tends to be very focused on asset accumulation, not the payout phase, as I've said a few times. Secondly, you're right, the level of financial literacy in the country is very, very low, and shifting the decisions to those individuals, to individuals, is very tricky. And so I think we have to expect to have much better advice and guidance as part of this — as part of the solution.

The third thing is we have to make sure that, for folks who have it, that they are enrolled, and so automatic enrollment, automatic escalation of savings are important. And the final thing is many people believe that their — the major approach that we're using now, which is called target date funds, many folks believe that those funds actually provide for guaranteed income once they retire, and that's not true. And so I think we need to restructure what goes on in so-called target date funds or QDIAs (ph), if I could use a technical term, the qualified default investment alternatives, to answer what people assume is going on, which is that they — we should have in those elective options the chance to have income from life (ph), as well as a chance to save.

30-second question, much longer answer, fairly technical, but I think you've put your finger on something really important, which is there's got to be some reform around 401ks to overcome some of the weaknesses that you pointed out.

SENDER: And of course on your website you have a lot of information on these issues.

FERGUSON: Yes, we do.

SENDER: It is 9:00. We always end exactly on time. Thank you for making my job such a pleasure.

(APPLAUSE)

FERGUSON: Thank you very much.

END