New study finds:
ADDING REAL ESTATE EXPOSURE TO DEFINED CONTRIBUTION PLANS ENHANCED THE RISK-RETURN PROFILE, DAMPENED VOLATILITY & IMPROVED OUTCOMES FOR PARTICIPANTS
A 10 percent mix of listed and unlisted real estate would have improved retirement outcomes for plan participants and provided a smoother path to success
NEW YORK, (November 4, 2014)– An allocation of as little as 10 percent to a mix of listed and unlisted real estate enhanced the risk-return profile of a defined contribution (DC) plan portfolio, improving the probability of successfully achieving desired retirement outcomes, according to the results of a new study released today by the Defined Contribution Real Estate Council (DCREC).
The study, A Path to Better Retirement Outcomes: Allocating Real Estate Assets to Retirement Portfolios, was conducted by Michael E. Drew, PhD, a Professor of Finance at the Griffith Business School at Griffith University, Adam N. Walk, PhD, also from the Griffith Business School, and Jason M. West from Bond University.
The study determined that the sequence of portfolio returns plays a critical role in the ability of DC plan participants to achieve their retirement savings goals, and this is particularly important late in the accumulation phase and early in the transition to retirement. Further, a portfolio strategy that includes real estate could deliver a smoother transition, improving long-term participant outcomes, and helping DC investors avoid adverse responses to temporary market setbacks example, switching out of risky assets and moving out of the market altogether after a significant downturn. This gradual transition increases the likelihood that participants will ‘stay the course’ and achieve their goals.
In the study covering the period from January 1976 to January 2014, the authors examined historical DC-style asset allocations, including target date and target risk funds, and added a 10 percent allocation to real estate for their research. The simulated portfolios ranged from 100 percent stocks to a 60/40 stock/bond blend, and included well-known established target date and target risk glidepaths. The real estate allocation was made up of a 50/50 blend of listed and unlisted real estate. For the portfolio simulations including a real estate allocation, the exposure to real estate was taken equally from the stock and bond portions of the portfolio.
Based on these simulations, the authors concluded that the portfolios:
Defined Contribution plans could have benefited from adding real estate to their portfolios, achieving similar performance and in some cases better results when compared to portfolios without real estate, while avoiding some of the pitfalls experienced by plan participants during serious market disruptions. Even a modest 10% allocation to listed and unlisted real estate can produce a stabilizing effect, according to the recent study.
DCREC SURVEY: DEFINED CONTRIBUTION PLAN SPONSORS SEE FURTHER APPLICATION OF REAL ESTATE AND OTHER “ALTERNATIVES” IN DC PLANS
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:
The Defined Contribution Real Estate Counsel (DCREC) conducted research using APCO Insight to understand defined contribution (DC) retirement plan experts’ views of real estate (both private and public) investments in DC plans.
Leading Institutional Real Estate Managers form Council to educate defined contribution plan investors about real estate
Defined Contribution Real Estate Council to focus on better retirement solutions for American workers through real estate investment
NEW YORK, N.Y., May 1, 2013
As American workers continue searching for ways to boost their retirement income, a coalition of 10 global institutional real estate asset managers today announced the formation of a new trade group to help educate plan sponsors and consultants about ways in which investment in commercial real estate may enhance retirement security for defined contribution plans and their participants.
The New York-based Defined Contribution Real Estate Council (DCREC) will serve as a resource for investors and plan sponsors who may be considering alternative investments options, such as real estate, through their existing portfolios.
“We will learn from each other to the betterment of the entire market," said David Skinner, a principal with Prudential Real Estate Investors and co-president of the new group. “Whether in a public retirement fund or a private fund, real estate adds an important layer of diversification to the existing array of investment options which will help to reduce overall volatility.”
“At the end of the day, our goal is to help plan sponsors and their participants achieve better investment outcomes through the use of institutional quality real estate solutions,” said Scott Brooks of Deutsche Asset & Wealth Management and DCREC co-president. "We are forming this council at a time when defined contribution plans are under increasing pressure to deliver improved outcomes for their participants."
Skinner and Brooks note that as traditional pension plans, or defined benefit plans, gave way to 401(k) plans and other similar defined contribution plans, investors and plan sponsors have failed to fully grasp the role commercial real estate can play as part of a balanced, long-term retirement savings portfolio.
The idea for DCREC stemmed from a September 2011 conference led by Ben Adams, Founding Partner of Ten Capital Management. This group of global real estate asset managers gathered to discuss ways in which real estate investment could help the more than 85 percent of American workers, without a traditional pension, save enough money for retirement.
In addition to serving as a forum for best practices, ideas, strategies and data, DCREC plans to generate original research and educational offerings.
“I tip my hat to the DCREC and its efforts to improve outcomes for the country’s workers,” said Charlie Ruffel, founder of PLANSPONSOR magazine and managing director of Kudu Advisors. “The defined contribution business is moving from a retail to an institutional business model and this group represents an important component of this trend. I believe the DCREC will serve as the focal point for this segment of the defined contribution business going forward.”
Founding members include Prudential Real Estate Investors, Deutsche Asset & Wealth Management, Goldman Sachs, Clarion Partners, Principal Real Estate Investors, Ten Capital Management, TIAA-CREF, ARIS Advisors, UBS Global Real Estate, and NAREIT.
For more information, contact Mary Adams +1 201.445.7007
Source: Defined Contribution Real Estate Council
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