REITs in 401(k), 403(b) & 457 Plans

401(k), 403(b) and 457 Plans Increasing Their Use of REITs

Numerous experts, including those in the academic, investment consulting, investment management and plan sponsor communities, view commercial real estate as a fundamental asset class that should be used in all investment portfolios in addition to equities, bonds, and cash. For decades, many defined benefit plans have invested in real estate for diversification, income, and inflation protection.

Within the past few years, the defined contribution market has seen a dramatic increase in the use of real estate within asset allocation products such as target-date and target-risk funds, products which have increasingly become the investment of choice for retirement plan participants. Evidence of this trend may be found in Callan Associates’ 2009 industry survey which found that 73% of the target-date fund managers 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.

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

Recently, Wilshire Associates, a prominent investment consultant, released a study on the role of REITs within the asset allocations of target-date funds. The research includes target-date fund glide path optimizations for 12 asset classes using two methodologies. Following is a key excerpt: "This analysis supports the case that the target-date fund glide path for future retirees should include a meaningful allocation to the commercial real estate asset class through U.S. or global listed REITs and real estate equities in the range of five percent to 18 percent." For access to the complete Wilshire Associates study, click here.

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