Defined-contribution-plan sponsors are constantly looking at
new products and investments to aid participants wanting to
grow their retirement asset base. One area of growth has been
real estate. Although it can be difficult for individual
investors with smaller portfolios to enter that asset class,
more and more funds are being offered within DC plans that
provide real estate exposure.
Plan sponsors, however, are not adopting these plans in
great numbers although that may be changing. We
are starting to see a small shift, but I dont think
its anything that is huge right now, says Michelle
Reuter, principal in the real estate boutique and head of
research for North America with Mercer Investments in Chicago.
Weve seen a couple of products come to market, like
a daily valued fund of funds, she says. We would
REITs [real estate investment trusts] or stand-alone
investments. We think real estate is most appropriate in
target-date or diversified inflation-hedged
She notes that whereas the trend is in its infancy, plan
sponsors have been looking to provide fewer options for
participants, thus lessening the confusion over available
choices. Real estate within target-date funds allows them
to come up with more creative solutions so that they still have
broad diversification but, for example, not have to
choose a commodities,
TIPS [Treasury Inflation-Protected Securities] or real
estate product, Reuter says.
Given market concerns over liquidity, plan sponsors should
make private real estate allocations a priority, says David
Skinner, co-president of the nonprofit Defined Contribution
Real Estate Council (DCREC) and the DC practice leader for
Prudential Real Estate Investors in Parsippany, New Jersey.
A report published last month by the DCREC recommended that
DC plan sponsors give strong consideration to allocating listed
and unlisted real estate investments, generally through
target-date funds. The report goes on to say that the
allocation should be a relatively modest 10 percent, which
would provide less risk and volatility than a conventional
portfolio without such a real estate component.
To do this, notes Skinner, the DCREC is proposing a
three-pronged approach to get plan sponsors to consider options
with real estate exposure. First, plan sponsors and
consultants, simply by reading the study, can familiarize
themselves with the potential for better returns that come with
investing in real estate. A second element is to educate the DC
marketplace about the mechanics of daily valuation, liquidity
and execution. Says Skinner: As an industry, we are
looking at how to come up with common practices on how real
estate can be implemented in a multiasset class
structure. Third, let plan sponsors and consultants know
such products exist, he adds.
The Utah Retirement Systems is among the plan sponsors that
have gotten into real estate as part of diversification
efforts. Craige Stone is director of the networks $4.5
billion DC savings plan. Utah is currently going through the
process of mapping older asset allocation funds and rolling out
target-date funds to replace them. Stone says Utah has been
monitoring real estate as an option since 2006. However, he
says, the fund managers didnt feel the industry had
developed enough yet to address concerns about daily valuation
and liquidity. Now, he says, the models are developed
well enough to offer private real estate within the
At the same time, Utah has relied on the research and advice
of its consultants and its defined benefit real estate staff,
which has suggested that if real estate is good for the
DB plan, it should also be good enough for the DC plan.
Stone says the newer target-date funds will be rolled out in
2015. But the fund is not sitting still in terms of the real
estate portfolios it will offer. The DC real estate space
is evolving, notes Dan Larsen, senior real estate
investment analyst with Utahs defined benefits plan.
We started looking at these investments in 2012.
Theyve changed so much in terms of options, flexibility
and concerns. We anticipate it is going to continue to change,
so we continually want to monitor the DC private real estate
DCRECs Skinner agrees and adds that most sponsors that
run a defined benefits plan understand the positives of
investing in private real estate and want to mirror that model
in their DC plans. Early adopters are those plan sponsors
that had real estate in their DB plans and are bringing them
over to DC, he says.
Skinner says estimates show that target-date funds will
account for about 60 percent of all DC assets in the next five
to ten years. Says Skinner: Ultimately, its in the
target-date space that most of these sponsors are going to
implement a real estate solution, so we really looked at the
study not just as a series of outcomes but in the context of
the structures that exist in DC plans and how real estate could
improve plan participant outcomes.
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