Diversification was cited as a key benefit of alternative investments in general, but plan sponsors remain somewhat confused about the definition of alternative investments, possibly skewing the pace of adoption, the council found in a survey of plan sponsors and consultants.
The council’s goal is to promote the inclusion of investments in direct commercial real estate and real estate securities in DC plans. Its members include Deutsche Asset & Wealth Management, Goldman Sachs, Prudential Real Estate Investors and TIAA-CREF, among others.
Sponsors of DC retirement plans see continued growth in the adoption of alternative investments in plan offerings. Low correlation was seen as the primary benefit of alternatives. Lower volatility, high risk/adjusted returns and inflation protection were ranked lower in importance, and income was viewed as least important. Operational issues, including valuation and daily liquidity, remain an obstacle for some alternatives.
All survey respondents had real estate in their plans in some form, with plan sponsors and consultants generally considering real estate one of the more straightforward of alternative investments. Still, some plan sponsors and consultants showed reluctance to include real estate as an asset class among their core offerings because of slower adoption rates and perceived liquidity issues, especially with direct real estate.
Direct real estate is newer to the DC market and was still perceived by some as having operational challenges. The survey found that in some ways, attitudes toward direct real estate and publicly traded real estate investment trusts (REITs) were at opposite ends of the spectrum for many plan sponsors and consultants.
Direct real estate was seen as having a low correlation to traditional assets, but lacking the liquidity and valuation of REITs. Fees were also a concern. REITs were viewed as offering liquidity and a longer history within DC plans; however, they were also thought of as too closely tied to the broader equity market—leading some survey respondents to see these funds as more of a traditional asset than a distinct alternative.
The survey findings suggest that there is opportunity to expand the offerings of direct real estate in DC plans and listed REITs as well, says David Skinner, co-president of the Defined Contribution Real Estate Council. Plan sponsors and consultants recognize the diversification benefits, but the key is to address ongoing concerns over valuation, liquidity and cost, he adds. According to Skinner, these concerns speak to the core mission of the council, which is providing an educational framework that will allow DC plan sponsors and their advisers to better understand the role of real estate in a retirement.
Interviews with decision-makers or stakeholders at 16 organizations were conducted by APCO Insight in the fourth quarter of 2013. Organizations fell within three categories: large corporate 401(k) plan sponsors representing close to$40 billion in assets (five interviews); investment consultants with assets under advisement of more than $7 trillion (six interviews); and target-date fund managers with assets under management of more than $7 trillion (five interviews).
The Defined Contribution Real Estate Council takes the position that DC plan participants should have the opportunity to benefit from the same long-term attributes of commercial real estate investments that defined benefit (DB) plan participants have enjoyed for many decades. More information about the council is on its website.