(updated with correction)
Real estate investment trusts have a place in defined contribution plan target-date allocations, even for funds designed for older workers and retirees, according to research released Monday by Wilshire Associates and the National Association of Real Estate Investment Trusts.
Executives at NAREIT, a Washington-based trade group, commissioned the study because they believed target-date funds were giving up performance by being underallocated to REITs.
Currently, REITs are not included in target-date funds of retired participants, while other target-date REIT allocations range from a maximum of 1.4% for funds designed for the youngest participants to 1% for participants preparing to retire in 2015, according to data on the average target-date allocations as of June 2011 provided by NAREIT.
But optimal allocations range from 18% for the youngest plan participants to 5% for those with an investment horizon of five years, according to the findings of Wilshire Associates, the Santa Monica, Calif.-based consulting firm.
“Wilshire believes there is a benefit from risk diversification and total return and income enhancement” of adding REITs, said Cleo Chang, managing director in the funds management division of Wilshire.
Wilshire found that a target-date fund holding U.S. REITs in the 35 years through 2010 would have produced an ending portfolio value nearly 10% higher than a portfolio without REITs.
An increase in allocations to U.S. or global REITs and listed real estate securities for target-date funds for younger workers resulted in smaller or no allocations to U.S. Treasury inflation-protected securities, high-yield bonds and U.S. small-cap equities, according to Wilshire's white paper on the research.
This indicated that REITs and real estate securities are a more efficient asset class to provide target-date participants with high and stable income, long-term capital appreciation and inflation protection, the paper said.
Wilshire asserts that REITs add income to portfolios of older plan participants. “Part of the feature of REITs is the income component,” Ms. Chang said. “In this low-yield environment, a lot of investors in retirement have a need to generate more current income in their retirement portfolios. REITs can step in and provide that additional (income) component.”
Target-date funds using high yield and fixed income instead would have to go further out on the risk spectrum to capture that yield, she said.