TIAA on the Slippery Slope

I've held investments through both TIAA-CREF and Merrill Lynch, and I can't imagine two more different companies. TIAA-CREF has always been like a big old family-run business - cheap, paternalistic and a bit backwards, but also old-fashioned in its commitment to the educators who comprise its customers. In contrast, Merrill Lynch - like many full-service brokers - seems like an oversized boiler room preying on unsophisticated (often elderly) investors. That's why I was disturbed when the former COO of Merrill, Herb Allison, was brought on as CEO a few years back after John Biggs left on his quixotic quest to keep the accounting firms honest. It's not as if the company didn't need a shake-up. But it has historically been a nonprofit (at least until losing its tax-free status after a run-in with Tom DeLay in the late 1990s). Its non-profit status allowed it to hold down costs for investors and to pay a relative pittance to the former academics who came aboard to work as CEOs.

All that ended when Allison came. He negotiated "base salary" of $1 million per year, but it's actually $8 million when you count a $3 million bonus within months of signing on and guaranteed $4 million in long-term compensation (not to mention a $24 million severance agreement). Allison immediately started firing long-time employees, bringing in high-paid Wall Street managers and spending heavily on branches and advertising. None of which is likely to comfort the academics who make up the bulk of TIAA-CREF's clientele.

Then, last year, two TIAA trustees were forced to resign after a business relationship with TIAA's auditor came to light. Interestingly, these two trustees also happened to be the ones who brought in Allison, and who were his main supporters on the board.

Maybe TIAA will die a lingering death if it doesn't change. Maybe it will become even more obscure than it already is. But does America really need another full-service broker and funds supermarket? I don't think so - especially when the ground that TIAA-CREF covets is already dominated by better known, more experienced companies like Vanguard, Fidelity and T. Rowe Price.