An analysis by Fred Reish and Bruce Ashton, Drinker Biddle & Reath LLP
In selecting investment alternatives, 401(k) plan sponsors—acting as fiduciaries— must apply generally accepted investment theories and prevailing investment industry practices. This means, in part, selecting a 401(k) lineup that is diversified across a sufficient number of asset classes (i.e., stocks, bonds, international investments, cash equivalents and real estate) to allow participants to develop appropriate portfolios in their accounts that reasonably reflect their risk and return objectives.
Unfortunately, the guidance issued by the Department of Labor does not specify which, or how many, asset classes should be included. Instead, plan fiduciaries should look to the prevailing practices within the institutional investment industry. To be safe, well-informed plan sponsors should consider including at least one investment from each of the major asset classes.
Some fiduciaries have not recognized that real estate is a major, or core, asset class. Real estate investments can play an important role in diversification because their market value fluctuation is not highly correlated to that of stocks and bonds. Further, real estate offers the prospect of enhanced risk-adjusted returns. The most liquid, daily-valued form of real estate investment is a real estate investment trust (REIT). As a result, prudent plan sponsors should consider including real estate as an asset class, and REITs as an investment alternative, in their plans.
While REIT managers may invest passively (i.e., indexed) or actively, historical performance numbers suggest that this is a category where active management has added value.
This white paper summarizes the fiduciary requirements imposed by ERISA on sponsors of participant-directed defined contribution plans for the selection of investments. In this context, we discuss the considerations for selecting real estate as one of the asset classes in a plan and the factors to be considered in selecting a specific type of real estate investment.
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Risks of Investing in Real Estate Securities. The risks of investing in real estate securities are similar to those associated with direct investments in real estate, including falling property values due to increasing vacancies or declining rents resulting from economic, legal, political or technological developments, lack of liquidity, limited diversification and sensitivity to certain economic factors such as interest-rate changes and market recessions.
These materials are provided for informational purposes only and reflect sources believed by Cohen & Steers to be reliable as of the date hereof. No representation or warranty is made concerning the accuracy of any data compiled herein, and there can be no guarantee that any forecast or opinion in these materials will be realized. This is not investment advice and may not be construed as sales or marketing material for any financial product or service sponsored or provided by Cohen & Steers, Inc. or any of its affiliates or agents.
Fred Reish and Bruce Ashton, the authors of this analysis, are partners in the Employee Benefits & Executive Compensation Practice Group of Drinker Biddle & Reath LLP. They are not affiliated with Cohen & Steers but have been compensated by us to provide this discussion. Cohen & Steers has also provided factual descriptions, charts, and investment information for their analysis.
The summary of law and analysis by the authors contained in this white paper are current as of January 2019, are general in nature, and do not constitute a legal opinion of the authors that may be relied on by third parties. Readers should consult their own legal counsel for information on how these issues apply to their individual circumstances and to determine if there have been any relevant developments since the date of this paper.