Sophisticated DC Plan Investors Increasingly Turn to Real Estate

Real estate is viewed as a cyclical asset class—specifically one that has been in a relative trough for several years and which can be expected to rebound and continue to grow over the next 10 to 15 years, including in the DC plan space.


U.S. defined contribution (DC) retirement plan investors’ appetite for real estate investments is increasing, with the median assets under management (AUM) of an investment manager overseeing DC real estate capital increasing more than 50% over the past five years, according to a new analysis. The report is a collaboration from the Defined Contribution Real Estate Council (DCREC), NAREIM [the National Association of Real Estate Investment Managers] and Ferguson Partners to publish the first edition of the “DCREC-NAREIM-Ferguson Partners Defined Contribution Survey.”

The findings build on six years of reporting by DCREC on daily-valued private real estate strategies in the DC market.

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The collaboration aims to help expand the metrics being tracked to provide a benchmark of DC capital flows and structuring considerations, as well as organizational and staffing best practices among DC real estate investment managers.

At a high level, the survey finds DC investors are increasingly sophisticated, having expanded their knowledge of the real estate asset class. According to the survey, many DC plan investors are looking closer at asset-level and manager performance, in addition to product structure, than they have in the past. As the survey report explains, the set of product choices continues to expand, as a growing number of real estate managers have launched daily-valued DC investment products over the past several years. Several say they expect to bring additional offerings to the market in the near to medium term.

Findings in the new survey echo those reached in a recent report published by J.P. Morgan Asset Management. That analysis posits that real estate is a cyclical asset class—specifically one that has been in a relative trough for several years and which can be expected to rebound and continue to grow over the next 10 to 15 years, including in the DC plan space.

J.P. Morgan’s analysts argue that, in the search for retirement income, especially with yields being so low and government bond returns even being negative, many investors are turning to real estate to deliver that income. They conclude that real estate can play a role in both the early stages of a target-date fund (TDF)’s glide path and the late stages of its glide path as a fixed-income substitute.

The “DCREC-NAREIM-Ferguson Partners Defined Contribution Survey” says DC plan investors cited diversification, risk-adjusted returns and inflation as the primary reasons for investing in real estate. The survey also shows that investors are increasingly willing to manage their own liquidity and, as they become more comfortable with the real estate asset class, they are evaluating new types of products and managers. The survey finds that a third of DC investors are investing with multiple managers rather than just one.

Despite the positive future momentum identified in the survey, today, very few DC plans invest directly in real estate, according to GuidedChioce, a digital advisory firm. Generally speaking, the only type of real estate investment typically available within a DC investment menu is a REIT. REITs, or “real estate investment trusts,” are companies that own or finance income-producing real estate in a range of property sectors. These companies have to meet a number of requirements to qualify as REITs. Most REITs trade on major stock exchanges.

According to GuidedChoice, REITs perform a lot like small/mid-cap value stocks rather than like private real estate. Analysts say this is not surprising, considering that most public REITs are in the major broad stock indexes.

When it comes to direct real estate investing within DC plans, a previous DCREC paper offered a checklist of principles and best practices to consider, including the following:

  • As a general matter, DC direct real estate product structures should accommodate the unique considerations that are important to DC plan fiduciaries, such as investor eligibility, regulatory oversight and tax reporting;
  • A DC direct real estate product should be structured as a tax-exempt entity or a vehicle that issues an IRS Form 1099 for tax reporting to minimize the administrative burden to plan fiduciaries and recordkeepers; and
  • A DC direct real estate product should use a structure that reduces unnecessary regulatory, operational and administrative expenses, while still providing an appropriate level of regulatory oversight and investment disclosure.

Pandemic Has Increased Financial Wellness and Retirement Readiness Disparities

Two-thirds of Black and Hispanic respondents to a Society of Actuaries survey said if they are changing or considering changing their plans for retirement, they will retire later.

The impact of the COVID-19 pandemic has had an uneven effect on those preparing for retirement across the generations and in the different racial and ethnic groups, a recent study suggests. The financial knowledge, priorities and strategies of Black, Hispanic and Asian Americans nearing retirement were studied, as well as how the pandemic has affected their ability to save for retirement.

According to the Society of Actuaries (SOA) Research institute’s “Financial Perspectives on Aging and Retirement Across the Generations Report on Race and Ethnicity,” financial priorities among Black, Hispanic and Asian American respondents were slightly different. While Asian American respondents are more likely to say saving for retirement is their top financial priority, Black and Hispanic respondents are more focused on being able to afford everyday bills and building up emergency funds—and less likely to report having retirement plan assets.

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Top financial priorities among all respondents were being able to afford everyday bills (65%), saving for retirement (58%), and building up an emergency fund (53%). Those priorities were broken down by race, with 79% of Hispanic and 77% of Black respondents more focused on being able to afford bills and 67% of Asian Americans focused the most on saving for retirement.

The report suggests that the impact of the COVID-19 pandemic has been uneven among racial groups, 57% of Hispanic respondents report that the pandemic had an overall negative effect on their finances and almost half experienced a job loss or pay decrease, while 37% of Black respondents and 35% of Asian American respondents report a negative impact on their finances.

Additionally, the pandemic has prompted three in 10 Black Americans and almost four in 10 Asian American and Hispanic respondents to change or consider changing when they will retire. Two-thirds of Black and Hispanic respondents and 61% of Asian American respondents said if they are changing or considering changing their plans because of the pandemic, they are now planning on retiring later than originally planned.

Across all retirement risks, Hispanic respondents report the highest levels of retirement-related concern, mostly worrying about not having enough money to pay for adequate health care, not being able to manage their finances, not being able to maintain their standard of living, and the value of their savings and investments not keeping up with inflation. The same can be said for younger respondents across all groups.

Almost eight in 10 Hispanic respondents report high levels of stress from at least one financial issue in 2020. Comparatively, around six in 10 Black and Asian American respondents say the same, according to the SOA report. Hispanic/Latino respondents are more likely to have been stressed by losing their source of income, paying for housing, saving for a goal, and affording medical expenses.

According to the study, debt is a significant issue for younger generations as it complicates finances and increases stress, and this is true among Black, Asian American and Hispanic respondents as well. More than other groups, four in 10 Hispanic respondents believe their level of debt is complicating their ability to manage their finances. The same is true for about three in 10 Black American and Asian American respondents. In each group, the younger generations are more likely to say debt is a bigger issue when it comes to managing their finances.

For many, the pandemic has only made debt issues worse, with 40% of Hispanic, 27% of Black American, and 18% of Asian American respondents experienced a negative impact on their level of debt since the pandemic began. Paying off credit card debts is a high priority for 55% of Hispanic, 52% of Black American and 42% of Asian American respondents. Additionally, the study found that 28% of Hispanic, 21% of Black American and 14% of Asian American respondents report high levels of stress due to debt.

As previous research has found, Hispanic Americans are lagging when it comes to retirement savings. The research shows that only 31% of Hispanic households with income (defined as those who had at least a part-time job) report they are currently participating in a workplace retirement plan—compared with 51% of non-Hispanic white income-generating households and 33% of Black income-generating households.

One way to ensure equal and fair incomes—which can result in higher savings rates among employees—is by conducting a pay equity analysis or a pay audit, according to PayScale, a U.S. compensation data and software company. Conducting an analysis clarifies if there is a pay gap within the organization and, if so, the size of the discrepancy. 

Another key way to support Black and Hispanic workers is by speaking to them and understanding their individual needs, Joshua Dietch, vice president of retirement and thought leadership at T. Rowe Price previously told PLANADVISER. “The first step in this journey may be as simple as seeking input from underrepresented minority employees about what would be helpful to improve financial wellness,” he said.

Aside from implementing plan benefits that could alleviate debt, such as student loan repayment programs, and offering health savings accounts (HSAs), which can help workers pay for medical costs and avoid medical debt, T. Rowe Price recommends plan sponsors incorporate retirement plan designs that prioritize participation, including automatic enrollment, auto-escalation, vesting or incentives such as employer matches. Offering emergency savings, consumer debt management financing and transactional processing can also help employees overcome barriers to saving, the firm adds.

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