Documeent title on one or two lines in Gustan Book 24ptLifecycle Index Funds in a rising

interest-rate environment

TIAA-CREF Asset ManagementFall 2015

Elina Steinberg Director Client Portfolio Management TIAA-CREF Asset Management

Stephen MacDonald, CFA Managing Director Client Portfolio Management TIAA-CREF Asset Management

Favorable product design, fixed-income asset class characteristics and macro factors may mitigate the impact of a rise in rates. In spite of recent financial market volatility, the longer-term U.S. economic recovery remains intact. Labor markets continue to strengthen, housing activity has steadily improved, and consumer sentiment has returned to pre-crisis levels, helped in part by falling gasoline prices. All of this creates a supportive backdrop for the economy and bolsters the case for higher interest rates. The Fed, while making it clear that the timing and scope of any rate hikes will remain data dependent, has become more upbeat about inflation and employment trends, and thus more comfortable with the prospect of ending its zero-interest-rate policy after seven years. TIAA-CREF Lifecycle Index Fund investors may be wondering how a rise in rates could affect their Fund performance.

This question is particularly relevant for investors who are nearing retirement and whose Lifecycle Index Fund portfolios, by virtue of their glidepath design, have become more conservatively positioned over time through increased allocations to fixed income. Of concern is that exposure to fixed income—the asset class most sensitive to interest-rate changes—is increasing for participants approaching retirement just as rates are poised to begin rising. (Interest rates and bond prices are inversely related: generally, when interest rates rise, bond prices fall, with a potentially negative impact on fixed-income investment returns.)

While interest-rate risk is always a consideration in fixed-income investing, there are three key factors that may help buffer the impact of a potential rate increase on TIAA-CREF Lifecycle Index Funds investors.

W Diversification matters. Maintaining diversified fixed-income exposure can help mitigate interest-rate risk, as different sectors and security types tend to respond differently to changing rates.

W Varying factors may temper a rise in rates. A number of mitigating factors may limit the scope of prospective rate increases over the next 12 months. Moreover, history suggests the impact of rising rates on fixed-income market performance may be less severe than is commonly feared.

W TIAA-CREF’s Lifecycle Index glidepath maintains a higher allocation to equities. Although our Lifecycle Index Funds, like others, increase their fixed-income exposure over time, relative to peers they tend to maintain a higher allocation to equities all along the glidepath, from beginning to end. This may better position investors for a rising rate environment during the particularly crucial years leading up to and through retirement.

In the pages that follow, we examine these factors in greater detail, with the goal of providing Lifecycle Index Funds investors with an informed perspective on the prospect of rising interest rates and their likely impact.

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Lifecycle Index Funds in a rising interest-rate environment

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1. Diversification matters.Different types of fixed-income securities respond differently to rising rates.Sensitivity to interest-rate movements can differ substantially based on duration, credit quality, and type of security. Relative to U.S. Treasuries, corporate bonds (both investment-grade and high-yield), floating-rate notes, emerging-market debt, shorter-term issues, and certain types of structured securities may provide greater protection from losses during periods of rising rates. When Treasury rates rise, credit spreads can tighten as the market supports a shift to riskier asset classes. This is largely because improving economic conditions typically lead to lower expected default rates for credit sectors, making them a potentially better relative value with a more favorable risk/reward tradeoff than Treasuries.

Recent examples of significant rate movements and fixed-income performance bear this out. Between January 2009 and June 2015, there were six periods in which the 10-year Treasury yield rose by 60 basis points or more. During those periods, total returns for fixed-income markets varied widely, demonstrating the value of diversification. Performance based on the average returns for all six periods is listed and ranked by category in Exhibit 1.

Exhibit 1: Which fixed-income sectors tend to outperform when interest rates rise?

Average total returns over six periods of rising rates (ranked from highest to lowest within categories)

Sources: Barclays, TIAA-CREF Asset Management. Total returns for all categories shown are based on the respective components of the Barclays U.S. Aggregate Bond index, except as follows: high yield (Barclays U.S. High Yield Index); global emerging markets (Barclays Global Emerging Markets Index); floating-rate notes (Barclays U.S. Floating Rate Notes Index); and municipal (Barclays U.S. Municipal Bond Index). It is not possible to invest in an index. Index performance does not reflect investment fees or transaction costs.

Recent periods of rising interest rates

DatesNumber of days

Change in 10-year Treasury yield

Jan 1, 2009 – Dec 31, 2009 365 +139 bps

Oct 8, 2010 – Feb 8, 2011 123 +134 bps

Sep 22, 2011 – Oct 27, 2011 35 +70 bps

July 25, 2012 – Mar 11, 2013 229 +64 bps

May 1, 2013 – Sep 5, 2013

(“taper tantrum”)

127 +132 bps

Feb 2, 2015 – Jun 10, 2015 128 +82 bps

Asset class/sector1 High Yield 12.73%2 Global EM 3.12%3 Floating Rate Notes 2.02%4 Corporate 0.77%5 Securitized 0.02%6 Municipal -0.22%7 Agencies -1.06%8 U.S. Aggregate -1.15%9 Treasuries -3.45%10 Treasuries 20+ Year -13.33%

Quality1 Baa 2.47%2 A 0.10%3 Aa -0.91%4 Aaa -1.59%

Maturity1 1-3 Years 0.75%2 3-5 Years 0.21%3 5-7 Years -0.71%4 7-10 Years -2.19%5 10+ Years -7.44%

Securitized1 CMBS 4.91%2 ABS 3.40%3 MBS -0.40%

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On average, longer-term, higher-rated bond sectors underperformed during periods when Treasury yields were rising, while shorter-term, lower-rated, and securitized assets outperformed. Among the 21 fixed-income categories we studied, the disparity in performance was dramatic, with an average gap of 26.06% between the highest and lowest returns.

In today’s volatile market, some risk-averse investors may be tempted to overweight the very segments of the fixed-income market—such as Treasuries—that are likely to underperform when rates rise—when it could be more prudent to maintain broadly diversified fixed-income exposure as represented by the Barclays U.S. Aggregate Index.

The advantage of diversification across a range of fixed-income sectors is built into TIAA-CREF’s Lifecycle Index Funds, as the Funds provide exposure to all of the security types, quality ratings and maturities represented in the broad-based Barclays U.S. Aggregate Bond Index, as well as to inflation-linked bonds (at appropriate points along the Funds’ glidepath).

2. Varying factors may temper a rise in rates.Both historical perspective and current conditions suggest rate rises could be modest, and market reaction muted. While fixed-income losses due to rising interest rates present a risk, corresponding market fears may be disproportionate to the severity and lasting impact of the losses actually incurred. Such fears are based partly on exaggerated expectations for the scope of future rate increases.

Assuming at least a mild to moderate rate increase is on the horizon, it’s natural to try to anticipate its likely impact. We can look to history to see how fixed-income markets have performed when rates were rising, recognizing that the past may provide useful context but is not a predictor of future outcomes, as economic and market conditions are never identical.

Exhibit 2: Bond markets have shown resilience following rate increases

Intermediate-term government bonds 1-year and rolling 3-year total returns since 1926 W 1-year return W Rolling 3-year return

Source: Ibbotson Associates.

Performance reflects the Ibbotson Associates Stocks, Bonds, Bills, and Inflation (SBBI) US Intermediate-Term Government Total Return USD index. It is not possible to invest in an index. Index performance does not reflect investment fees or transaction costs.

20142010200620021998199419901986198219781974197019661962195819541950194619421938193419301926

TIAA-CREF fixed-income management

W 13 portfolio managers with average experience of 25 years

W 34 senior research analysts with average experience of 15 years, supported by 16 research generalists

W More than $250 billion in fixed-income assets under management,* including the fixed-income funds in which our Lifecycle portfolios invest

*As of 9/30/15.

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With that caveat, our analysis shows that bond markets have tended to be resilient, bouncing back after initially incurring losses during rising rate environments. For example, since 1926, there have been five years—1931, 1956, 1958, 2009 and 2013—in which long-term interest rates1 started below 3.5% and jumped by at least 50 basis points (+0.50%) over the course of the year. In those years, intermediate-term government bonds returned -2.32%, -0.42%, -1.29%, -2.40% and -1.07%, respectively.

However, as illustrated in Exhibit 2, those one-year losses reversed relatively quickly. Rolling three-year returns (encompassing the current year and the subsequent two years) for 1931, 1956, 1958 and 2009 were 2.67%, 1.96%, 3.19% and 4.60%, respectively. (A rolling three-year return beginning with 2013 is not yet available.)

Of course, past performance does not guarantee future results, and there is no assurance that fixed-income markets will repeat this pattern of short-term reversals in the next interest-rate cycle. Nonetheless, in the long run, the risk of being underexposed to fixed income due to market timing may outweigh the risk of exposure to rising interest rates. Investors who maintain a longer-term focus, consistent with the Lifecycle Index Funds’ objective, and resist the impulse to react to short-term volatility, are more likely to benefit from the positive returns of fixed-income assets over time. For this reason, investors are often better served by maintaining consistent, strategic exposure to fixed income.

Beyond the lessons of history, a number of mitigating factors unique to the current market environment may also point to a relatively modest rise in interest rates over the next 6 to 12 months. These factors include:

W Continued central bank support, despite the end of QE in the U.S. Although its QE asset purchases concluded in October 2014, the Fed continues to reinvest the proceeds from its agency and MBS portfolio, thus providing liquidity and helping to keep market rates in check. In addition, amid a slowing global growth environment, the European Central Bank and the Bank of Japan have embarked on large-scale QE programs, and the People’s Bank of China has repeatedly cut interest rates in the past ten months. All of this should serve to keep global rates low.

W Robust global appetite for Treasuries. While many governments around the world are racing to depreciate their currencies in an effort to spur economic growth, U.S. monetary policy is moving in the opposite direction. As a result, demand for the relatively higher yields available on dollar-based assets remains strong, boosting their prices and limiting the scope of rate increases.

W Benign inflation outlook. Five- year “breakeven” levels—the difference in yields on nominal and inflation-protected Treasury securities, and a measure of inflation expectations—are at the lower end of their post-financial-crisis range. This suggests that markets are not anticipating significant inflationary pressures that would spur higher U.S. rates.

It is worth noting that there are risks to the outlook for moderate interest-rate increases. Rates could rise more quickly if:

W Wage growth or other economic indicators materially surprise to the upside, leading to higher inflation expectations

W Oil or other commodity prices rise more than current base case scenarios would suggest

W The Fed terminates the reinvestment of its QE proceeds earlier than expected, effectively withdrawing liquidity from fixed-income markets

In the long run, the risk of being underexposed to fixed income due to market timing may outweigh the risk of exposure to rising interest rates.

1 As measured by the Ibbotson Associates Stocks, Bonds, Bills, and Inflation (SBBI) US Long-Term Government Bond Yield.

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3. Our Lifecycle Index glidepath maintains a higher allocation to equities.Greater exposure to equities may position the Lifecycle Index Funds better than peers when rates increase.The glidepath of TIAA-CREF’s Lifecycle Index Funds is designed to accommodate the growing life expectancy of the U.S. population, requiring a balance between longevity risk and market risk. As a result, relative to many peers, our Lifecycle Index Funds tend to have a higher allocation to equities along all stages of the glidepath, particularly in the years leading up to and in retirement.

At an investor’s target retirement date, assuming an age of 65, TIAA-CREF’s Lifecycle Index Funds are allocated evenly between equities and fixed income, thus offering balanced exposure (i.e., without an overweight to fixed income). This design is intended to give investors the continued ability to participate appropriately in equity markets over a potentially extended retirement period.

Our Lifecycle Index Funds’ final allocation, reached 10 years after retirement (at an assumed age of 75), is 60% fixed income and 40% equities—a notably higher allocation to equities than the 30% to 35% weighting used by most of our peers. Our final allocation is a long-term strategic decision for our glidepath and not a temporary move in anticipation of higher interest rates. It reflects our belief that we must prepare our participants for a potentially longer retirement period with the ability to draw down savings gradually. However, it also positions our funds well for a rising rate environment in which fixed income would be expected to underperform equities.

Exhibit 3: TIAA-CREF Lifecycle Index Funds glidepath maintains higher allocation to equities

W Inflation-Protected Assets W Short-Term Fixed Income W Fixed Income W International Equity W U.S. Equity

Represents significant change to the glidepath

U.S. Equity Russell 3000® Index

International Equity MSCI EAFE® + Emerging Markets Index

Fixed Income Barclays U.S. Aggregate Bond Index

Short-Term Fixed Income Barclays 1 – 3 Year Government/Credit Index

Inflation-Protected Assets Barclays U.S. Treasury Inflation-Protected Securities (TIPS) Index (Series–L)

Source: TIAA-CREF Asset Management. The above chart represents the strategic asset allocation progression of one of a series of multi-asset class portfolios with target retirement dates at 5-year intervals. Asset allocations represent the exposures sought at the given number of years before the maturity of the fund and are not actual mutual fund exposures. Allocations are presented for information only and may not represent the actual allocation at the time of investment.

-30-25-20-15-10-5051015202530354045Years to Retirement

100

80

60

40

20

0

Allo

cation

s %

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2 Lifetime income is a guarantee subject to the claims-paying ability of the annuity issuer.

You should consider the investment objectives, risks, charges and expenses carefully before investing. Please call 877 518-9161 or log on to tiaa-cref.org for product and fund prospectuses that contain this and other information. Please read the prospectuses carefully before investing.

Diversification is a technique to help reduce risk. There is no guarantee that diversification will protect against a loss of income.

Please note: The target date for Lifecycle Funds is the approximate date when investors plan to start withdrawing their money. The principal value of the fund(s) is not guaranteed at any time, including at the target date.

TIAA-CREF products may be subject to market and other risk factors. See the applicable product literature, or visit tiaa-cref.org for details.TIAA-CREF Individual & Institutional Services, LLC, Teachers Personal Investors Services, Inc., and Nuveen Securities, LLC, Members FINRA and SIPC, distribute securities products.

©2015 Teachers Insurance and Annuity Association of America-College Retirement Equities Fund (TIAA-CREF), 730 Third Avenue, New York, NY 10017

C26731141011957

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Lifecycle Index Funds in a rising interest-rate environment

Moreover, TIAA-CREF Lifecycle Index Funds are rebalanced on a monthly basis. Rebalancing—which individual investors are less likely to do when attempting to manage asset allocations in their retirement savings on their own—helps ensure the intended allocations to equity and fixed income are maintained along the entire glidepath. In addition to keeping asset allocation on track, rebalancing may enhance return potential. For example, during periods in which interest rates are rising and equities are outperforming fixed income, rebalancing entails selling stocks at higher prices (thus taking profits) and buying bonds at lower prices. This process allows our Lifecycle Index Funds to replace older, lower-yielding fixed-income securities with newer issues offering higher yields. (Recall that price and yield are inversely related.)

Professional advice in conjunction with Lifecycle Index Funds We recommend that individuals nearing or already in retirement take advantage of TIAA-CREF’s advice offering. An advice session with a financial advisor offers professional guidance in evaluating different options based on an investor’s specific return objectives, income needs, and risk considerations. Consulting with a TIAA-CREF financial advisor may be especially helpful for investors considering the purchase of an annuity to convert the assets accumulated in a Lifecycle Fund during their working years into a vehicle that provides lifetime income in retirement.2

ConclusionAlthough the prospect of higher interest rates is on the horizon, we think the diversified fixed-income exposure provided through the TIAA-CREF Lifecycle Index Funds remains a prudent strategic allocation for our participants. Our differentiated glidepath design, along with regular rebalancing, lends further support to the Lifecycle Index Funds’ ability to navigate a rising interest-rate environment. Moreover, TIAA-CREF offers additional investor resources, including opportunities to meet with a financial advisor, which may complement the use of Lifecycle Funds to help pay for and enjoy successful retirement outcomes.

For more information about TIAA-CREF’s Lifecycle Index Funds, asset management capabilities, and market perspectives, visit tiaa-cref.org.

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