DC Plan Sponsors see further application of real estate, other alternatives in plans

Tuesday, June 10, 2014 1:09 PM | Deleted user


Diversification cited as key benefit but confusion remains around what constitutes an “alternative investment”, potentially slowing the pace of adoption

Surveyed plan sponsors and institutional consultants represent more than $14 trillion in assets

NEW YORK, (June 10, 2014) – Sponsors of defined contribution (DC) retirement plans see continued growth in the adoption of alternative investments in plan offerings, with real estate viewed as a fundamental asset class and an attractive avenue to portfolio diversification, according to the results of a new survey released today by the Defined Contribution Real Estate Council (DCREC). 

These findings are based on in-depth interviews conducted with 401(k) plan sponsors, plan consultants, and target date fund managers that collectively represent more than $14 trillion in assets under management or advisement. While the majority of those queried expressed support for including alternative investments in DC plans, there remained some confusion as to just what constituted an “alternative,” the survey found. 

“Real estate was valued for its ability to add diversification, with inflation protection and income viewed as significant but less important attributes,” said David Skinner, co-president of the Defined Contribution Real Estate Council. “At the same time, the survey also indicated that some debate remains as to how to define alternatives, including real estate, which may be slowing their inclusion in plans.” 

Other findings from the survey include:

  • Low correlation was seen as the primary benefit of alternatives. This was followed by lower volatility, high risk/adjusted returns, and inflation protection. Income was viewed as least important.
  • Operational issues, including valuation and daily liquidity, remain an obstacle for some alternatives.
  • There is some openness to placing limits on quarterly contributions and withdrawals to alternatives, though challenges remain.
Opportunity for direct real estate 
All those surveyed had real estate in their plans in some form, with plan sponsors and consultants generally considering it one of the more straightforward options among alternatives. Nonetheless, some plan sponsors and consultants still showed reluctance to include the asset class among their core offerings due to slower adoption rates and perceived liquidity issues, especially with direct real estate.  

Direct real estate is newer to the DC market, and was still perceived by some as having operational challenges, primarily around daily valuation and liquidity. In fact, the survey found that in some ways attitudes towards direct real estate and publicly-traded real estate investment trusts (REITs) were at opposite ends of the spectrum for many plan sponsors and consultants. Direct real estate was seen as having a low correlation to traditional assets, but lacking the liquidity and valuation of REITs. Concerns were also expressed over fees. REITs were viewed as offering liquidity and a longer history within DC plans. However, they were also thought of as too closely tied to the broader equity market, leading some of those surveyed to see these funds as more of a traditional asset than a distinct alternative.

“Our findings suggest that there is a real opportunity to expand offerings of direct real estate in DC plans, and listed REITS as well,” said Skinner. “Plan sponsors and consultants clearly recognize the diversification benefits. The key is addressing ongoing concerns over valuation, liquidity, and cost. This goes to the heart of why DCREC was established – to provide the educational framework that will allow DC sponsors and their advisors to better understand the role of real estate in a retirement plan.”

About the Defined Contribution Real Estate Council (DCREC)

The Defined Contribution Real Estate Council was formed in 2012 to promote the inclusion of investments in direct commercial real estate and real estate securities, including REITs, within defined contribution plans. Its goal is to improve participant outcomes by furthering education about, advocacy for, and best practices of such investments.

Founding members include ARIS Advisors, Clarion Partners, Deutsche Asset & Wealth Management, Goldman Sachs, NAREIT, Principal Real Estate Investors, Prudential Real Estate Investors, Ten Capital Management, TIAA-CREF, and UBS Global Real Estate. Total membership has grown from 10 to 27 firms since its launch. 

More information can found be at www.dcrec.org

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