Investing April 18, 2023

DC Council Expects Increase in Real Estate Investing

Real estate allocations can strengthen participant outcomes and reduce volatility, according to the Defined Contribution Real Estate Council.  

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Increasingly, defined contribution plans are adding real estate allocations to help strengthen portfolios, according to the Defined Contribution Real Estate Council.  

Defined benefit plans have long included allocations to private and public real estate, but DC plans have previously been slow to follow suit. The decline in both stocks and bonds in 2022 may be changing that mentality, as real estate assets have tended to deliver positive returns even when those more traditional investment vehicles decline, according to the council’s research. 

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“There is a philosophical disconnect between what is offered to DB vs. DC participants,” the council’s report quoted Marco Merz, managing director and head of defined contribution at the University of California system, as saying.  

“On the DB side, we use private real estate, private equity, and absolute return strategies, but not on the DC side. As a participant in both our DB and DC plans, it makes no sense that I personally have implicit exposure to alternative assets in the DB plan but cannot access the very same exposures on the DC side.”  

The council expects more DC plans to include real estate in their investments due to it offering strong diversification, according to the researchers. Historically, real estate assets have shown negative correlations to traditional stock and bond asset classes. Across a broader range of investment cycles, this can combat portfolio volatility and offer risk-adjusted return potential, the council noted.  

Increasing allocations in real estate can also stabilize return profiles. Real estate investments produce recurring cashflows from rent or lease payments, providing income which is durable and steady. In fact, while real estate is often classified as an “alternative asset,” it is the third largest asset class in the U.S., the council noted, coming in at $20 trillion as of June 30, 2021, behind fixed income at $48 trillion and equities at $47 trillion. 

Furthermore, over time, rents have tended to increase, delivering steady income growth. Real estate has historically generated strong, stable total returns over the long term, protecting real returns and reducing inflation risk. 

Real estate has helped reduce downside risk exposure when used as part of a multi-asset portfolio. When traditional 60/40 allocations have declined, real estate assets have typically delivered positive returns such as in 2022. 

“Since 2002, a traditional 60% equity/40% bond (60/40) portfolio has generated negative quarterly performance 28% of the time. During these periods, private real estate assets and REITs have delivered positive returns 90% and 70% of the time, respectively,” the report stated.  

The DCREC report suggested utilizing the blended exposure of core private real estate and publicly traded REITs. Core private real estate strategies generally offer more direct exposure to the bricks-and-mortar characteristics of the asset class, while REITs provide greater liquidity but are usually more influenced by directional stock market trends over short-term periods. 

Multi-asset class target-date funds and white-label funds are most ideal for adding a core private real estate allocation to DC portfolios, according to DCREC. Additionally, the portfolio’s traditional asset classes can satisfy potential liquidity needs.  

“Overall, we see this as an exciting opportunity for plan sponsors who want to expand participant investment potential by accessing strategies that incorporate less liquid private investment alternatives, particularly private real estate,” the council wrote. 

Benefits April 18, 2023

Employees Favor SECURE 2.0 Mandates, Larger Matches

Plan sponsors may bolster retirement plan engagement and contributions with SECURE 2.0 enhancements, a Natixis survey shows.

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Employers’ responsibility for helping workers save for retirement only seems to grow, especially in the wake of the SECURE 2.0 Act of 2022.

Workers are excited about the SECURE 2.0 provisions that mandate retirement savings plans and worried about how much inflation will keep them from saving more, according to new data from Natixis Investment Managers.   

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Overall, 81% of employees—including Millennials, Generation Xers and Baby Boomers—favor mandates that require employers to offer retirement plans, the 2023 Natixis Defined Contribution Plan Participant survey found.

“American workers are feeling the weight of responsibility for retirement funding, and younger generations, in particular, are pushing for changes that will better meet their distinct needs and preferences,” stated Liana Magner, U.S. head of retirement and institutional in the US for Natixis Investment Managers, in a press release “Making retirement savings easy and appealing and helping them stay on track, particularly during periods of financial stress, will take united efforts from employers, individuals, and policymakers.”

Workers are keen for policies that can help employers assist them to save more for retirement, the survey showed.  

Mandates Are Favored

Workers overwhelmingly favor employer retirement savings mandates, Natixis found, with the sentiment expressed by 88% of Millennials, 79% of Gen Xers and 70% of Baby Boomers.  

 

Millennials

Gen X

Baby Boomers

Employers should be mandated to offer retirement plans

88%

79%

70%

Employer matching contributions should be made mandatory

87%

74%

67%

Individual contributions toward retirement savings should be made mandatory

82%

59%

54%

 

SECURE 2.0’s retirement reforms require new 401(k) and 403(b) plans to start enrolling participants with a salary deferral of at least 3% of salary (no higher than 10%) and to escalate at 1% per year of service up to a minimum of 10% and maximum of 15%. Employers that start or have started retirement plans after December 29, 2022, will, beginning in 2025, be required to automatically enroll employees, the survey noted.  

SECURE 2.0 Enhancements and Plan Engagement

SECURE 2.0 also permits employers, beginning in 2024, to match employees’ student loan payments with retirement plan contributions and allows plan sponsors to assist participants with retirement plan-linked emergency savings accounts that allow four penalty-free withdrawals per year.

“With mandates taking effect, employers will need to focus on their Qualified Default Investment Alternative as large numbers of participants tend to stay with that initial investment,” the report’s section on SECURE 2.0 stated. “Millennials (40%) were more likely to stick with the QDIA selected for them when they were enrolled,” compared to 26% of Gen X participants and 18% of Baby Boomers.”

Natixis found the SECURE-linked enhancements to retirement plans are favored by participants.

  • 42% of workers who do not contribute now, including 63% of Millennials, say they will begin to participate in their company plan when student loan payment matching benefits take effect;
  • 54% of non-participants, including 77% of Millennials, intend to participate if linked emergency savings features become available; and
  • 31% of Millennials who participate now were automatically enrolled, and 40% of those still hold the default investments initially selected for them.

Student loans are often cited as a key savings challenge for younger workers, and their effects are most acute for Millennials, as the cohort holds an average of $40,000 in student loan debt, data cited by the Natixis report showed.

Inflation Eating Into Retirement

When survey respondents were asked what keeps them from saving more for retirement, 44% of workers chose the response that inflation is “eating up too much of my paycheck,” followed by workers who say they are prioritizing other financial goals at 37%, employees who note they have too much debt to pay at 26% and the high cost of health insurance as a barrier at 25%, the survey showed.  

The greater pressure on workers’ finances from rising prices is experienced across generations, including 44% of Millennials, 44% of Gen Xers and 45% of Baby Boomers, Natixis found.

In March, the Consumer Price Index for All Urban Consumers, a price index measuring a basket of goods and services, increased 0.1% and showed a 5% rise over the last 12 months, data from the Bureau of Labor Statistics showed.

What Can Plan Sponsors Do?

A larger employer match is the top incentive that participants said would encourage them to increase their contributions, at 65%, and employer match was cited by 71% of nonparticipants as something that could get them to enroll in a workplace plan, Natixis found.

Matching contributions may also be an effective lever for employers in a tight labor market.

While respondents reported an average maximum company match of 7.8%, Millennials were most likely to work for a company that offers greater than a 10% match, at 31%. In the past 12 months, 54% of Millennials and 43% of all respondents said their employer increased the company’s match, Natixis found.

The survey also found that plan participants want to see a range of investment options available in their plans:

  • Retirement income-generating investments, 90%;
  • Sustainability-focused options, 82% (including 92% of Millennials);
  • Alternatives, 77%; and
  • Cryptocurrency, 52% (including 78% of Millennials).

The Natixis Investment Managers Survey of U.S. Defined Contribution Plan Participants was conducted by CoreData Research in January and February 2023. The survey included 736 U.S. workers, 587 plan participants and 149 nonparticipants. Of the 736 respondents, 362 were Millennials ages 27 to 42, 166 were Gen Xers ages 43 to 58 and 208 were Baby Boomers ages 59 and older.

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