For such a small component of defined contribution investment menus, real estate investment trusts can play multiple roles ranging from allocation diversification to inflation protection to a proxy for direct real estate.
And because REITs are woven into a diversified fabric of DC plans, often through target-date funds, consultants and providers said prevailing plan structures mean the benefits of REITs are retained — even when the REIT industry in general has taken a coronavius-induced beating this year. Interviewees said they didn't detect panic among sponsors or providers.
"We haven't seen any movement to date" of target-date managers changing REIT exposure or strategies due to the coronavirus-caused volatility in the real estate industry, said David O'Meara, the New York-based director of investments at Willis Towers Watson PLC.
Noted Denise Burns, the New York based vice president and head of investments at Cammack Retirement Group Inc.: "It hasn't really changed that much for our clients. They "are not leaving the sector. Sponsors are staying the course."
One reason is that participants may not be aware they are investing in REITs. For example, if they invest in mutual funds that track the S&P 500 index, they also are investing in the 31 REITs that are part of the index.
The year-to-date S&P 500 Index total return was 9.74% through August. By contrast, the year to date FTSE Nareit All Equity REIT index return was down 9.87% this year through August, according to Nareit, the real estate investment trust industry trade organization.
If DC plan participants invest in a target-date fund, the REIT component is integrated into diversified holdings accounting for perhaps as much 5% of total target-date fund assets, Mr. O'Meara said.
For DC clients of Cammack Retirement, for example, REITs represent an estimated 4% to 5% of total plan assets, Ms. Burns said. Many Cammack clients offer broadly diversified stand-alone REIT funds.
And consultants say that if DC participants invest in a stand-alone REIT fund, sponsors likely offer a diversified fund featuring multiple REIT sectors to help offset the volatility of specific sectors.
"We're long-term investors," said John Worth, Nareit's executive vice president for research and investor outreach, adding that REITs today have stronger balance sheets than REITs during the 2008-2009 crisis. "REITs are quite resilient."
REITs accounted for $29.8 billion in DC assets at year-end 2019, according to Pensions & Investments annual survey of DC money managers covering U.S. institutional tax-exempt DC assets managed internally.
Last year's assets rose 35% from the $22.1 billion in 2018. Between 2014 and 2018, the annual amounts ranged from $21.2 billion to $24.6 billion. Total DC manager assets were $7.9 trillion by year-end 2019; internally managed assets were $6.94 trillion, according to P&I data.