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Planning and managing a retirement investment portfolio today is, more often than not, the responsibility of individual investors. Defined contribution 401(k)s and Individual Retirement Accounts make up approximately two-thirds of the $18 trillion retirement savings marketplace. Among these defined contribution plan investors, target date funds, which create and manage investment portfolios based on the year in which the investor plans to retire, are becoming increasingly popular investment products.
Target date funds are meant to provide defined contribution investors with the same kind of professional portfolio management that defined benefit plan participants have been able to count on over the years. As the years pass, target date funds automatically rebalance the mix of securities in the portfolio, generally shifting from higher-growth, higher-risk strategies to higher-income, lower-risk ones.
Target date funds are beginning to realize the benefits of real estate investment and increasingly are including real estate allocations, primarily through REITs.
NAREIT is actively working to support this trend and, as the feature on target date funds in this issue reports, that effort has gained momentum from new research conducted by Wilshire Associates on the benefits of REIT allocations in target date funds.
Wilshire found that a target date portfolio including U.S. REITs would have produced an ending portfolio value nearly 10 percent higher than a portfolio without REITs over the 35-year period from 1976 through 2010, while also reducing risk. A $10,000 initial portfolio using REITs would have generated $322,279 in retirement savings over 35 years, or $28,634 more than a portfolio without REITs. The improvement is due to REITs’ high and stable dividends, long-term capital appreciation, inflation protection, and low to moderate correlation with other assets invested in a well-diversified portfolio.
Depending on the number of years to retirement, optimally allocated target date funds should include REIT allocations of nearly nine to nearly 18 percent, Wilshire found.
A number of leading target date fund providers, including BlackRock, PIMCO, UBS and Alliance Bernstein, have included REIT allocations in their funds. However, many of the largest target date providers are giving up performance because they are under-allocated to REITs.
According to the management consulting firm Casey, Quirk & Associates, target date funds are expected to attract 80 percent of new and reallocated flows into defined contribution retirement plans over the next decade.
Clearly, the retirement savings of millions of Americans will depend on these funds. Wilshire’s research indicates that REITs can help provide the performance these investors are seeking.
DONALD C. WOOD
NAREIT Chair
President & CEO,
Federal Realty Investment Trust