According to the Defined Contribution Real Estate Council (DCREC),
which advocates for the use of direct commercial real estate and real estate security
investments within defined contribution (DC) plans, an allocation of 10% of
participant assets to a mix of listed and unlisted real estate leads to better long-term
outcomes. In short, the DCREC suggests real estate can be used to address
sequence of return risks that can damage DC retirement savers’ lifetime income
prospects when market downturns occur close to the retirement date.
explained in the DCREC report, “A Path to Better Retirement
Outcomes: Allocating Real Estate Assets to Retirement Portfolios,” the
of portfolio returns plays a critical role in the ability of DC plan
participants to achieve sustainable retirement income. The sequence of
returns is especially important when the
participant is late in the accumulation phase or early in the transition
to retirement, at which point a sharp drop in portfolio asset values
cannot be made up with additional wage deferrals. To address this,
retirement plan participants traditionally move away from riskier equity
investments in favor of fixed income to address the potential of a
downturn, the DCREC report notes.
Adding real estate holdings as part of this transition
process from equity to safer assets can help smooth the impact of market setbacks on near-retirees, the report explains.
This effect is achieved because real estate investments tend to be less
correlated with market returns.
In addition, buying long-term real
estate holdings can help younger DC investors avoid adverse responses to temporary
market setbacks—for example, switching out of risky assets and moving out of the
market altogether when volatility increases (see “DC Participants Get Jumpy on Equity Holdings”).
The DCREC says its recommendations are based on a study
covering historical market data from January 1976 through the start of 2014. Study
authors first examined a variety of DC-style asset-allocation programs that came into
popularity during the study period, including target-date and target-risk portfolios.
The simulated portfolios ranged from 100% stocks to a 60/40 stock/bond blend. The
researchers then examined the impact a 10% allocation to real estate (split
evenly between listed and unlisted real estate) would have had on each