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Target-Date Funds

The most important investment-related trend in the defined contribution (DC) market has been the dramatic increase in the use of asset allocation products, including target-date and target-risk funds. Some industry experts expect that a majority of assets in DC plans will be invested in these types of funds within the next 10 years.

According to a research paper entitled “Target-Date Retirement Funds: The New Defined Contribution Battleground” released late in 2009 by the management consulting firm Casey, Quirk & Associates, “…Target-date funds are becoming the core, if not the sole, product of interest within defined contribution plans...."

Corroborating this conclusion, the recent Profit Sharing/401(k) Council of America (PSCA) survey also reported that asset allocation funds, including target-date funds, have penetrated nearly all DC plans, with the proportion of plans now offering some type of asset allocation fund increasing to 98.4 percent. Casey Quirk estimates that target-date and target-risk retirement funds will attract 80 percent of new and reallocated flows into DC schemes over the next decade.

REITs and Target-Date Funds

Numerous investment experts, including those in the academic community, view commercial real estate as a fundamental asset class that should be used in all investment portfolios in addition to equities, bonds and cash. Many defined benefit pension plans already invest in real estate for purposes such as diversification and inflation protection. In DC plans, in most cases, real estate investing is performed through the use of publicly traded REITs. These REITs typically own and operate income-producing commercial property, such as malls, office buildings, hotels and apartment buildings, and are traded on various exchanges, particularly the NYSE.

Within the past few years, the DC market has seen a dramatic increase in the use of real estate within asset allocation products such as target-date and target-risk funds for diversification and inflation protection. Evidence of this trend may be found in industry data such as Callan Associates' 2009 survey, which found that 73 percent of the target-date fund managers it surveyed had a dedicated real estate allocation in their offerings. As recently as 2005, a minority of target-date fund managers were investing in real estate.

With respect to plan sponsors, the Casey Quirk survey referenced earlier which covered more than 400 DC plans and was conducted jointly with the PSCA, identified REITs as the most "highly sought" additional target-date fund asset class by far among respondents to the survey.

While some asset allocation products invest in private real estate providing real estate exposure within target-date and target-risk funds is typically accomplished through the use of publicly traded REITs, largely because of the liquidity these REITs provide for purposes such as making benefit payments.

Benefits of REITs Within Target-Date Funds

  • REITs provide an efficient means of gaining real estate exposure, including global exposure
  • REITs contribute a diversified source of returns within both equity and fixed income portfolio allocations
  • REITs deliver strong relative long-term performance
  • REITs provide inflation protection
  • REITs have application in achieving portfolio goals in both the accumulation and distribution phases of target-date, target-risk and other asset allocation product constructs