SCHEDULE 14A
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, For Use of the Commission
[ ] Definitive Proxy Statement Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-12
----------
TIAA - CREF Institutional Mutual Funds
(Name of Registrant as Specified in its Charter)
----------
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies: (2)
Aggregate number of securities to which transaction applies: (3) Per unit
price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.: (3) Filing Party: (4) Date
Filed:
ScholarShare Investment Board Request for Information
Additional Questions on TIAA-CREF's Proxy Statement
As discussed, the majority of these questions were asked during our conference
call with you. There are a few follow up questions. We need to have a completed
analysis by Friday, August 12, and will need a response from you on these
questions by Thursday. When a question number is given (such as #6) it refers to
the original set of questions that we sent you.
1. On page 24 of the final statement it states that the Funds will now be
responsible for additional services, including, "providing office
space, equipment and facilities for maintaining its operations and
supervising relations with the Funds' and facilities for maintaining it
operations and supervising relations with the Funds' other service
providers." And it also states that many of these services are
currently paid for by the Funds as "other expenses." Does this mean
that they will be moved from "other expenses" to part of the expenses
expected to be covered by the management fees and if so why aren't the
"other expenses" going down.
*For clarification, the paragraph you reference on page 24 refers to
the Advisor, not the Funds.
Yes, these services will be included in the investment management fee
instead of as "other expenses." While the movement of these services
from the service agreement to the investment management agreement will
reduce the Funds' "other expenses," in the aggregate the "other
expenses" of the Funds will still increase because the Funds will be
paying for other services directly on an at-cost basis rather than
through the investment management agreement or the service agreement,
which is being discontinued.
2. On page 26 of the final statement different fees, how they are
currently paid and how they would be paid under the new agreement are
discussed--SIB asked for a complete list of items with their
corresponding amounts under both the current and proposed agreements.
We have received a list of costs-- For each fund in which SIB is
invested, please find an exhaustive list of fund related expenses, as
divided into the following categories:
A. Those currently paid as part of the mgt fee (by shareholders)
B. Those currently paid directly be each fund (by shareholder but not
as part of the mgt fee)
C. Those currently paid in any other capacity
For A, B and C, we can only provide this information to the extent that
it is already disclosed in the Funds' shareholder reports. Please see
the reports for the categories of expenses that we have historically
disclosed.
D. Those proposed to be paid as part of the mgt fee (by shareholders)
Please refer to the investment management agreement in the proxy
statement.
E. Those proposed to be paid directly be each fund (by shareholders but
not as part of the mgt fee)
Services that are in "other expenses" include the following: custody,
trustee, audit, regulatory, fund accounting, transfer agency and
prospectus and financial reports.
F. Those proposed to be paid in any other capacity
None.
o For each expense in category A-F above, please provide historical
(for current) and expected (for proposed) dollar amounts.
We can only disclose the information that is already contained in
the Funds' shareholder reports.
o For each expense for categories D and F, please indicate who
bears/is expected to bear the cost.
Fund shareholders will bear these costs as part of the total expense
ratio.
o It is expected that the list of expenses listed in A-C and those
listed in D-F in aggregate are the same. If not, please provide an
explanation of any differences, including pecuniary implications.
Yes, it is expected they will be the same. The investment management
fee will include other expenses related to compliance with newly
implemented regulations, including having a Chief Compliance
Officer, anti-money laundering regulations, and Sarbanes-Oxley
requirements.
o It is expected that the list of expenses in A-C (for current) and
those listed in D-F (for proposed) should equal fund related
expenses. If not, please identify and provide dollar amounts of
any outstanding or additional fund related expenses Identify who
bears/ is expected to bear these expenses.
Under the new expense structure, these costs will be fully covered
by the investment management fee or "other expenses."
o For each fund invested by SIB please compare total fund related
expenses (both current and proposed) relative to total dollar
amounts as collected from shareholders and as collected otherwise.
It is expected that this difference for each fund should roughly
equate to what is characterized in the proxy
statement as a modest profit for the advisor. If not, please
identify and provide dollar amounts of any expense and of any
sources of payment that would be reflective of both the current
and proposed (profit) of each fund.
In prior discussions and in the proxy materials, we refer to the
fact that the Funds are offered below their operating costs,
therefore a representation of the current expense ratio and proposed
expense ratios will not equate to profits of the advisor. We are
unable to provide SIB with the current and proposed cash flows of
the advisor and the Funds beyond what is provided in the pro forma
information in the proxy statement and in shareholder reports. It
should be understood that the advisor does not explicitly collect
"other expenses," but that these fees are paid directly to cover
expenses associated with the operation of the Funds and are deducted
directly from the Funds' NAV. The investment management fee is the
only fee collected from shareholders by the advisor. Shareholders
pay no other expenses.
o Explain any major dollar differences between expenses incurred as
part of the current structure and those expected to be incurred
under the proposed structure.
None. A large majority of current expenses are either paid by
shareholders through the current expense ratio or absorbed by the
advisor. Because the advisor is providing services below cost, the
advisor is losing money under the current pricing structure.
o In the context of the above answers, please describe for each fund
in which SIB is invested, expected increases or decreases in
payments by fund shareholders (e.g. ScholarShare participants).
None. ScholarShare shareholders pay a unitary fee, they will only
pay the total fees for their ScholarShare investment, which will be
unaffected by the Funds' repricing proposal.
3. In your response to question #7, you stated, "These other expenses are
the actual direct costs of the Funds and tend not to vary widely based
on the investment strategy of the Funds." Please provide specific
quantitative evidence of the direct costs not tending to vary widely
based on the investment strategy.
Custody fees are an example, please see the Funds' shareholder reports
for information on custody fees on an assets under management basis.
4. Page 32 states, "the Board reviewed detailed information provided by
the Advisor relating to the nature, extent and quality of the services
currently provided by the Advisor and to be provided by the Advisor
under the Proposed Agreement. In particular, the Board reviewed
detailed independent analysis of comparative expenses and performance
data for each class of shares of each of the Funds
prepared by Lipper..." We are only provided summaries of what the Board
considered and would like to see the detailed information.
We are unable to provide this information.
5. In the document called, "Important Information For Shareholders," you
state that overall expenses are at levels that are competitive with
other low cost providers in the mutual fund industry. During our
conference call we asked who these low cost providers were. Since the
call we received the group information, but there is no information on
how the groups were derived from the larger Lipper sampling and there
is no information on the fees associated with each fund. Please provide
cost information for each fund in each group and explain how the groups
were derived.
Please refer to our response to question 16 in our original response,
detailing the factors included in Lipper's methodology for peer group
selection. The advisor does not believe it is appropriate to disclose
expense information of funds managed by other advisors. This
information is public and can be derived from prospectuses available
with the SEC.
6. In your response to question #4, you stated that, "TFI can assure you
that the repricing of the TIAA-CREF Institutional Mutual Funds will in
no way reduce or otherwise affect the amount of resources dedicated to
ScholarShare's non-investment functions, such as marketing or
administration under the current contract." During the call Phil
Rollock explained that fees currently going to TFI will now be going to
the investment division. Currently the parent company is making up for
the losses of the investment division and it will have to make up the
losses expected by TFI under this new cost structure. Phil Rollock
stated TFI will meet its contractual obligations to the program and
that TIAA-CREF will have to come up with the funding to make TFI whole.
Please reiterate this statement in writing. Will TFI have to make any
cuts of any kind to accommodate the proposed restructuring in fees? And
if so, where are they likely to come from? Additionally, is there any
possible chance that there will be any additional types of fee
increases that ScholarShare participants will be required to pay?
TFI will continue to meet its contractual obligations to the program.
TFI does not anticipate the need to make any cuts in response to this
proposal. As we have indicated previously, there will be no changes to
the price at which the ScholarShare program is offered as a result of
this proposal under the current contract. There will be no fee
increases as a result of this proposal.
7. It is our understanding from our call that if the Institutional and
Retail Mutual Funds are merged that there will be separate Retail and
Institutional shares in the funds and that only the 12b-1 fees would
only apply to the Retail shares. Is this understanding correct? Does
this also apply to the administrative fees or would they be charged to
Institutional account owners? Finally, notwithstanding whether 12b-1
fees would apply to ScholarShare account owners we would like question
#6
in our original list of questions answered. FYI--many of my comments
are just to couch this as more theoretical
This is correct. If the Institutional and Retail Funds were to merge,
their assets would be combined and Retail Fund shareholders would be
primarily invested in the retail class of the Institutional Funds.
There are no explicit administrative fees in the proposed fee
structure.
A marketing and distribution plan supported by the 12b-1 fee will
potentially lead to an increase in assets under management, therefore
allowing shareholders the incremental benefits of the investment
management fee breakpoint schedule outlined in the proxy statement. In
addition, the increase in assets has the effect of reducing the
percentage of fees per asset for certain expenses, such as audit
expenses, thereby potentially lowering the total expense ratio. The
proposed 12b-1 plan is a reimbursement plan, meaning that only actual
distribution expenses (up to the plan maximum of 0.25%) are presented
to and approved by the Board of Trustees before such fees are
collected. Under a traditional distribution plan, the entire fee amount
is paid by a fund regardless of actual distribution expenses.
8. In your response to question #11, you stated, "...it has become clear
that Teachers Advisors cannot continue to operate the Funds at these
low fee levels, due to increasing overall costs and the need to make
enhancements." Please further describe what was meant by "need" and
what was meant by "enhancements." What specific enhancements are
planned? Please quantify the costs of these enhancements. Also, please
answer the part of question #11 that we sent you previously which asks
"by how much" the fees were lowered in 2001.
As previously mentioned, the advisor is seeking to increase its
fundamental research capabilities. The advisor has also incurred
additional oversight enhancements due to the changing regulatory
environment. For example, one pending regulation is the need for the
Board of Trustees to review whether the Funds should adopt redemption
fees, for which the advisor will provide analyses regarding the
efficacy of the Funds' current frequent trading policies. As many of
these enhancements are prospective, we cannot accurately quantify them
at this time.
9. In your response to question #12 you stated that, "The social screening
process results in a Fund with a higher level of tracking error when
compared to a pure index fund. Due to the additional social screen
overlay, Teachers Advisors deemed it appropriate to categorize the
Social Choice Equity Fund as an actively managed fund." We believe
that tracking error (excess standard deviation) is a residual of the
fund's performance, not necessarily a function of the fund's intended
relative risk profile. We further believe that the fund's historical
tracking error of between 1.5% to 2.0% is more indicative of a
passively managed product than an actively managed product. Do you
agree with these statements? If not, please explain.
Explanation should include specific criteria utilized (e.g., all funds
with tracking error above 3.0% were classified as active) and how the
criteria were determined.
We do not disagree with these statements. Please note that the
categorization of the Social Choice Equity Fund as "active" was chiefly
intended to group this Fund with the other Funds that would be impacted
by the fee change for purposes of the proxy statement.
10.For purposes of the Social Choice Fund, how much is paid to KLD
Research for their services? How much of the fund's operating expenses
and management fee does this account for?
We are unable to provide this information.
11.The Social Choice Fund was compared to the Lipper Multi-Cap Universe.
What was the rational for choosing this universe? Does Lipper have a
universe for passive or enhanced multi-cap strategies? If so, using the
same periods as before, where does the pro forma expense for the Social
Choice Fund fall in this universe of funds?
Because the Fund and the benchmark use the Russell 3000 index, Lipper's
metrics classify the Fund as a multi-cap core product. Aside from an
S&P 500 Objective classification, Lipper does not have explicit passive
or enhanced classifications.
12.In your response to question #13, you stated, "Teachers Advisors has
confirmed to TFI that the numbers in the chart are correct." This
includes a pro forma total annual Fund Operating Expense for the Growth
& Income of 4.67%. It is our understanding from our conference call
that the reason for the high cost is that this is a very small fund and
auditing costs are proportionally high--please confirm that this is
correct.
Your understanding is correct.
13.In your response to question #14, you stated that "... individual Funds
do not make profits" and yet, both the preliminary and final proxy
statements state (Exhibit G, draft; Exhibit F, final) that funds "had a
net loss," "earned a modest profit," had a modest net loss." Please
answer questions #14 and #15 again assuming that profits can/are
attributed to individual funds. Also, in your prior answer, you stated,
"the proposed increase in fees would not unduly benefit the advisor at
the expense of Fund Shareholders." In this context, please describe
what "unduly" means? Additionally, please provide what the expected
costs and profits of each fund will be.
As noted in our prior response and in Exhibit F, Funds do not make
profits, however, the advisor can make profits or losses on its
management and operation of a particular Fund based on the fee level
for that Fund. As noted in Exhibit F, the
advisor has operated the vast majority of the Funds at a loss. Although
the advisor may have made a profit in some cases, one of the aims of
the repricing proposal is to create rationalized and consistent pricing
across all of the Funds to meet the current and anticipated costs of
operating the Funds. Therefore, the advisor is asking to restructure
the pricing of all of the Funds. "Unduly" means that the advisor's
profits will not be at a level that is inconsistent with TIAA-CREF's
principles or its history of being a low-cost provider of financial
products. We are not able to provide specific profit information on
each of the Funds.
14.In your response to question #17, you stated, "We have been informed by
Teachers Advisors that it has already begun implementing [these]
additions to staff." On our call you indicated that most of the
additions were at the analyst level. Are there any other additions
planned?
Yes. We anticipate an increase in investment management staff,
particularly around Funds that have been consistently underperforming.
15.Please answer question #18 again to clarify the expected effects if the
retail funds vote not to merge with the institutional funds. Please
describe the range of preferred alternatives if the mergers are not
approved. Please answer when the Retail Funds are expected to go up and
when the Institutional Mutual Funds are expected to go up (if they do).
Unfortunately, we are unable to discuss this topic in any depth as it
is non-public information. The advisor has not provided the Board with
specific alternatives to merger at this time.
16.In your response to question #20, you stated "Such alternative courses
of action could include closing some or all of Funds to new investments
or liquidating them entirely." How is Teachers Advisors going to
provide ScholarShare participants an appropriate diversity of
investment offerings if it elects to close some funds? Is it correct to
assume that funds producing a profit would continue to be offered? If
not, please explain.
Please see our answer to #15 above.
17.In your response to question #20, you stated, "At this time, TIAA-CREF
does not intend to move away from active management or the 529
business." On the call Phil Rollock unequivocally stated that TIAA-CREF
has no plans to get out of the 529 market. Please reiterate this
statement in writing.
TIAA-CREF has no plans to get out of the 529 business.
18.Are there any plans for changing the Retirement Fund fees? If not why
not?
Assuming you are referring to the College Retirement Equities Fund
(CREF) accounts, as we discussed on the call we have received specific
exemptive relief from securities and insurance regulators to offer CREF
as it is currently structured, so there are no current plans to change
CREF's fees. As we also discussed, CREF is managed by an entirely
different advisor than the Funds.
19.On page 25 of the final statement it states "the extremely low level of
fees that the Advisor has been charging....has been too low to cover
its increasing costs....while sustaining the level and quality of
service that shareholders deserve." How has service suffered because of
the low fees? Are the things listed in the bullet points on page 25
currently an issue because of low fees?
Service has not suffered, because the advisor has accrued losses to
support the Funds' operations.
20.Can you explain why the fees for the Institutional, Life Funds and TIAA
Separate Account VA-1 are different? On page 35 of the final proxy it
states that they are different, but that the Board determined there
were good reasons for this.
As we discussed, the Life Funds and TIAA Separate Account VA-1 are only
available as sub-accounts within variable annuity or variable universal
life products. The fees for these products were initially set lower
because investors must pay two layers of fees to invest in them, those
of the annuity and those of the underlying funds.
21.On the call we asked how far in advance SIB would be notified in the
event that funds were closed. Phil Rollock stated that he hoped there
would be substantial time; however, one of the people from the
investment funds only guaranteed there would be at least one months
notice. In the event that TIAA-CREF chooses to close funds the
ScholarShare Investment Board will need ample warning--preferably at 6
months.
TIAA-CREF will make every effort to provide ample notice in the event
any Funds are to be closed.