SURVEY SAYS: Does Real Estate Have a Place in Your Retirement Plan?

One option that isn’t much discussed, at least in the context of 401(k)s and other participant-directed savings programs, is real estate.   This week we asked readers if their program offered such an option – and how it has been received.

Perhaps not surprisingly, the vast majority (nearly 80% ) said their program does not – or does not currently – offer real estate as a participant directed fund option.   

The reasons offered were varied – but mostly centered around a lack of interest on the part of participants.   One reader noted, “For the last five years (my personal history) there has been no discussion about adding this option.   I may bring the subject up in the future, but we haven’t had any demand from our participants that I have heard of.”  Those sentiments were echoed by the reader who noted, “Among my many talks with participants, not one has ever asked for RE as an option.   Our in house group overseeing the plan would like to include RE, so perhaps some day it will happen if a better manager takes over the fund or we are allowed to go outside the family of current funds.”   However, it wasn’t just a lack of interest on the part of participants, as noted by the reader who said, “…I have not heard from our folks that they have an interest in adding one.   And we have not received any suggestions from our 401(k) vendor for this type.”   Another noted a recurring dilemma: “It is hard to strike that balance between providing a good selection of options and overwhelming the participants with too many choices….”

Liquidity Concerns

There were readers who had been “burned,” including the reader who recalled, “A number of years ago we offered a real estate fund investment option in our 401(k) plan.   We no longer do and would be very leery of doing it again.   Liquidity is the problem.   We offered units in a real estate equity trust fund sponsored by a major financial institution.   We (that is, both the plan sponsor and the participants who elected to invest in the fund) viewed the investment as long term and recognized the liquidity issue.   We also naively assumed that other investors would do the same.”  

One reader noted, “We used to have one, but our investment consultants suggested that for the average participant, the majority of their investments is the home they own.   Therefore, providing a REIT would allow participants to overweight real estate in their investment portfolio.”

Others had considered the choice, but as one reader cautioned, “I think in three years the plans that now put one of these funds in their plan will be sorry.   You may have employees asking for it, as they have done well over the past few years, but you are buying into these funds at the top of the market.”    Another offered, “We do not offer real estate investment funds because we consider them ‘fads’ and we don’t feel those kinds of choices are appropriate for a retirement plan.     We have had participants ask for them, however, but are not considering adding them at this time.”

The “Haves”

As for the roughly 21% who did have the option, reactions were mixed.   One who had added a REIT option earlier his year described participant allocations to the fund as “healthy.”   Perhaps with good reason, at least according to another reader who said, “Our 401K Retirement Plan has offered a real estate fund since the beginning of our plan many years ago…our real estate fund has been a ‘steady performer’ through the recent downturn. Basically, the fund is returning approximately 8% at the three-, five-, and 10-year milestones.”

But for most of the respondents who offered insights, the participant interest appeared to be rather tepid.   One reader noted that of a $12.3 million plan, “…$85,000 was invested in the real estate option, or 0.7%.”   Said another, “Fifteen out of 70 current employees, or 21%, are invested in that fund, which comprises 2% of total plan assets.   Our plan has 21 funds to choose from.”   Another reader observed, “Our plan rolled out a REIT offering in January 2004.   The fund is not very popular, holding less than 3% of plan assets at the time I write this.”   Another reader, whose plan had offered the option since 2003, said it “…has less than 1% of the total fund assets.”

Some readers without the option are, nonetheless, contemplating the addition.   One noted, “Our plan doesn’t currently offer a real estate option, but we are looking at adding one.”   Another said, “It has not been discussed yet, but I think it should be.”  One frustrated plan sponsor complained, “NO, but this is a damn shame!   I sit on the Investment Policy Committeee, and I am begging my colleagues to add a low cost REIT fund.   It would add good beta when compared to equities and provide better diversification within a total asset allocation model.   Problem is, most participants don’t understand asset allocation, so our IPC is afraid to offer REITs, believing participants will go for returns only. Like this is not already a problem within our equities?   Yikes, the flat world thinkers!”

But this week’s Editor’s Choice goes to the reader who said, “We considered offering a real estate investment fund, but rejected the idea when we realized our investment advisor didn’t seem to have the necessary knowledge to advise our employees on the fund – I’m not sure how much longer he will be our investment advisor.”

Thanks to everyone who participated in our survey!

I have not thought of real estate for our plan.  Probably a good idea.

Personally, I'm waiting for a cute little Florida cottage to be finished so I can retire to it and stop worrying about everyone else's money.

Yes our Plans added a REIT option earlier this year.   Participant allocation to it was healthy.

1.    Do we offer real estate as an investment option in our DC plan?   No

2.    Have we thought about adding it?   Yes

3.    Has our third party administrator thought about adding it?   If so, they kept it a secret.

We do not offer a real estate investment fund and I have not heard from our folks that they have an interest in adding one.   And we have not received any suggestions from our 401(k) vendor for this type.

No, we don't have a RE option in our 401(k).   Our investment committee is revisiting our options now to make sure we have good coverage of the core asset classes.   I'd like to see us add asset classes like emerging markets and real estate, but I don't know how it will go.   It is hard to strike that balance between providing a good selection of options and overwhelming the participants with too many choices...

Our plan does not offer a real estate option.    It is has not been discussed yet, but I think it should be.

Our 401K Retirement Plan has offered a Real Estate Fund since the beginning of our Plan many years ago.   You are correct in your article, our Real Estate Fund has been a "steady performer" through the recent downturn. Basically, the fund is returning approximately 8% at the 3,5, and 10 year milestones.

Our plan is 12.3 million and at year end (12/31), $85,000 was invested in the real estate option or 0.7%.  The majority of our investments 9.2 million are invested in 5 lifestyle funds

Our plan has 15 investment choices.   We do not offer Re as one.   It was considered however our provider only has one RE fund and it has consistently ranked among the bottom in the sector so we opted not to include it among the offering.  

Among my many talks with participants not one has ever asked for RE as an option.   Our in house group overseeing the plan would like to include RE so perhaps some day it will happen if a better manager takes over the fund or we are allowed to go outside the family of current funds.

We do not offer real estate investment funds because we consider them "fads" and we don't feel those kinds of choices are appropriate for a retirement plan.     We have had participants ask for them, however, but are not considering adding them at this time.

Our plan does not offer a real estate fund or REIT.

Yes, our 401(k) plan offers a real estate fund as of 1/1/04.

No Real Estate fund.   We used to have one, but our investment consultants suggested that for the average participant, the majority of their investments is the home they own.   Therefore, providing a REIT would allow participants to overweight real estate in their investment portfolio.   In addition, the concentration of a REIT involves more risk.   Our large cap blend fund has some exposure to real estate, but with less risk.

Our plan doesn't currently offer a real estate option, but we are looking at adding one.

Yes, our plan does offer a Real Estate investment option.   15 out of 70 current employees or 21% are invested in that fund, which comprises 2% of total plan assets.   Our plan has 21 funds to choose from.

Our plan rolled out a REIT offering in January, 2004.   The fund is not very popular, holding less than 3% of plan assets at the time I write this.

NO but this is a damn shame!   I sit on the Investment Policy Committee and I am begging my colleagues to add a low cost REIT fund.   It would add good beta when compared to equities and provide better diversification within a total asset allocation model.   Problem is most participants don't understand asset allocation, so our IPC is afraid to offer REITs believing participants will go for returns only. Like this is not already a problem within our equities?   Yikes the flat world thinkers!

We have the Nationwide Resource Platform with 700 funds including several Real Estate funds.   There is one real estate fund in our core portfolio and plan participants are free to use the fund window to choose any of the available RE funds for their personal portfolio.

We don't offer a real estate investment fund and to my knowledge we have never considered one.

Our plan does offer a real estate investment option - currently only 3% of the total portfolio is invested in that option.

We do not include REITs in our fund listing but have discussed it.   Two years ago our investment advisor demonstrated the total lack of correlation the REIT has to various stocks and bonds and sold me (so I immediately bought some personally with some IRA money) but the investment committee decided that the investment was too sector concentrated and risky to allow our rather uninformed investors to have access to real estate in their pension plans.

We do not have a real estate option in our 401k Retirement Plan.   We have weighed the pros and cons of adding such an option, but do not feel that it would be a good fit at this time.

Yes we do have   a Real Estate Fund   since 2003 and has less than 1% of the total fund assests .

We considered offering a real estate investment fund, but rejected the idea when we realized our investment advisor didn't seem to have the necessary knowledge to advise our employees on the fund - I'm not sure how much longer he will be our investment advisor.

We're an investment advisor to numerous 401(k) plans, including both large and small plans. We've recommended REIT funds to clients for about a decade, both as plan menu options, and in model portfolios that we construct. Approximately one-third of our client plans offer a REIT fund, and these generally tend to be smaller plans--$20MM and down. The larger plans look more to what other similar employers are doing, and are less likely to offer REITs, since most large plans don't offer REIT funds.

I'm reminded of a call I took in 1999 from a participant's wife. We were advisors to the plan, and managed model portfolios that included a REIT fund. She was livid that we were including a REIT fund in the Aggressive Portfolio--she couldn't see how a REIT could be part of an "Aggressive" allocation. I told her that REITs provided diversification, and that "Aggressive" didn't mean "Foolhardy". She countered that REITs had obviously underperformed broad market indexes, such as the S&P 500, for the past several years. I replied that this simply indicated that REITs were in fact effective diversifiers. When she asked if there was any way for her husband to invest in a model portfolio that didn't include REITs, I flat out said no--he could transfer to the S&P 500 index fund, but that all our portfolios included REITs. I don't know if   the transfer ever occurred, but if it did, I bet it led to some marital strife over the next few years!

A number of years ago we offered a real estate fund investment option in our 401(k) plan.   We no longer do and would be very leery of doing it again.   Liquidity is the problem.   We offered units in a real estate equity trust fund sponsored by a major financial institution.   We (that is, both the plan sponsor and the participants who elected to invest in the fund) viewed the investment as long term and recognized the liquidity issue.   We also naively assumed that other investors would do the same.   However, a number of major pension funds also investing in trust were not, as it turned out, looking at the fund as a long-term investment.   During a "down" real estate market several of these large DB pension funds tried to pull huge chunks of money out the trust, thereby forcing a freeze on the trust that resulted in a lengthy, arduous and expensive legal process to liquidate the entire fund to the advantage of none except the lawyers, accountants et al.

We offer it through our mutual fund window and only 1 participant out of the 100 we have uses it.

Thanks for this daily dose of useful info!

Yes, our retirement plan has a publicly traded REIT portfolio available to participants.

We do not offer a Real Estate fund at this time and currently have no designs on it.   I think in three years the plans who now put one of these funds in their plan will be sorry.   You may have employees asking for it as they have done well over the past few years but you are buying into these funds at the top of the market.   In 1999 we had employees dying to get involved in a Technology fund at the top of that market.   In the last four or five years we have not had anyone suggesting that we add a technology fund to our line up.   It is a danger to continually chase the hot sector of the market and I don't think plan administrators should be fueling this behavior.   It is exactly the type of behavior we caution employees about in our educational meetings ………….and you know how well those work.

Our plan does NOT offer a real-estate fund or other alternative. It is one of the reasons I'm looking into the 'personal brokerage account' option for my assets in the plan.

We do not offer a Real Estate option.   For the last five years (my personal history) there has been no discussion about adding this option.   I may bring the subject up in the future, but we haven't had any demand from our participants that I have heard of.