The Markets September 10, 2019

Determining Whether DC Plan Clients Should Offer Real Estate Investments

Investors cite several common considerations for including a dedicated allocation to real estate, and a recent survey of American investors found real estate ranked as the top investment option they consider to be the safest for long-term retirement investing.

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“While investments in real estate have long been common for defined benefit plans, more plan sponsors are turning to property markets to diversify their defined contribution (DC) portfolios,” Thomas M. Anichini, CFA, chief investment strategist at GuidedChoice, a digital investment advisory firm, wrote in a blog post.

Aside from capital market assumptions, he noted, investors cite several common considerations for including a dedicated allocation to real estate, including: inflation hedging, portfolio diversification, high tangible asset value, competitive risk-adjusted returns and attractive and stable income returns. “A substantial portion of the world’s wealth consists of property. It would seem obvious that real estate would be a part of a long-term investment portfolio,” Anichini said.

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A new survey from SophisticatedInvestor.com of 2,000 Americans between the ages of 35 and 65 examines which investment option they consider to be the safest for long-term retirement investing. According to the findings of the survey, when asked which option they would choose from, 22.4% of all respondents selected real estate as the safest long-term investment for retirement—the top choice. When demographic filters were applied to the survey results, 25.1% of respondents between the ages 45 and 54 selected this investment option.

Very few defined contribution (DC) plans invest directly in real estate, according to Anichini. He added that, as a result, the only type of real estate investment typically available within a DC investment menu is a REIT. REITs, or real estate investment trusts, are companies that own or finance income-producing real estate in a range of property sectors. These companies have to meet a number of requirements to qualify as REITs. Most REITs trade on major stock exchanges.

According to Anichini, REITs perform a lot like small/mid-cap value stocks than like private real estate. He said this is not surprising, considering that most public REITs are in the major broad stock indexes.

A 2014 Callan study found that about 70% of target-date funds (TDFs) have some exposure to REITS. And, DC plan sponsors and participants may be surprised to learn that most publicly available REITs are already available in their plan’s index funds. For example, Anichini said, if a DC plan already has a large cap index fund and a small-cap index fund, it already has exposure to all the REIT exposure it could obtain by adding a dedicated REIT fund.

However, he noted that does not mean there is no basis for having a dedicated REIT fund in a DC plan. The Callan study found 22% of DC plans offer REITs in their fund lineup. The tendencies of REITs both to perform like stocks and to belong to broad indexes tend to weaken the case for including a dedicated REIT fund in the lineup, but two additional rationales may support including a dedicated REIT fund in a DC plan lineup:

  • If capital market assumptions extend to the level of equity market sectors, at times DC plan sponsors and participants may find the REIT sector specifically appealing. Anichini said this rationale would make a dedicated REIT fund desirable to enable overweighting the sector.
  • The lineup’s active mid-cap or small-cap funds might underweight REITs or not hold them at all. He said this rationale is the case for a completion strategy that seeks to avoid an inadvertent underweight in the sector.

James Veneruso, vice president and defined contribution consultant in Callan’s Fund Sponsor Consulting, previously told PLANADVISER, “The problem with REITS is that they tend to behave a lot like equities so they may have volatilities similar to that of equities. But what we’ve been seeing slowly over time is that through TDFs, participants are now able to access direct or private real estate. Private real estate gives you the advantage of a lot less volatility. So you’d have an asset class that over the long term could have a return similar to REITS but with a dampened volatility profile.”

As a general matter, DC direct real estate product structures should accommodate the unique considerations that are important to DC plan fiduciaries, such as investor eligibility, regulatory oversight and tax reporting, the Defined Contribution Real Estate Council (DCREC) says.
Deals & People September 9, 2019

Principal Reveals Eagerly Awaited Wells Fargo Platform Integration Strategy

Principal is incorporating capabilities from the Wells Fargo Institutional Retirement and Trust platform into its own proprietary recordkeeping system, which will serve Principal and transitioning Wells Fargo customers moving forward.

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Principal Financial Group made public some much-anticipated details about its ongoing integration of the Wells Fargo Institutional Retirement and Trust business.

Principal’s acquisition of Wells Fargo was first announced early in 2019 and more recently made final. Through the acquisition, Principal effectively doubled the size of its U.S. retirement business, while bringing on institutional trust and custody offerings for the non-retirement market and expanding its discretionary asset management footprint.

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As explained to PLANADVISER by Renee Schaaf, Principal’s president of retirement and income solutions, the firm remains busy incorporating capabilities from the Wells Fargo recordkeeping platform into its own proprietary recordkeeping platform, “which will serve Principal and transitioning Wells Fargo customers moving forward.”

“We believe a better retirement begins with a better customer experience, both in-person and online,” she explains. “Investment in our digital capabilities in combination with our top-tier service model will enable plan sponsors to deliver more successful outcomes for their participants.”

According to Schaaf, the Principal platform, serving defined contribution and defined benefit participants, “will evolve to incorporate the best capabilities from Principal and Wells Fargo IRT.” She says Principal has accelerated investments in the Principal Total Retirement Suite (TRS) and its retirement recordkeeping system by launching “next generation financial wellness resources” such as Principal Milestones and Principal Real Start.

Schaaf adds that, with the addition of key Wells Fargo capabilities, including “deep plan benchmarking and real-time performance monitoring and feedback to promote plan health,” plan sponsors and participants will be able to seamlessly access a single service provider for multiple retirement plan types.

“We know that plan sponsors want help with gauging the effectiveness of their plan,” Schaaf says. “Wells Fargo IRT has a method to help improve this and taken alongside the Principal best-in-class experience and data automation, is a perfect example of how we’re bringing the best from each organization to drive customer outcomes.”

Schaaf claims plan sponsor clients will gain access to helpful tools and resources to manage administrative functions such as payroll processing, loans, participant notices and more. She says the firm is rolling out a chat feature for retirement plan sponsors connecting them with real-time answers to administrative questions. With the combined platform, Schaaf says, participants will benefit from tailored onboarding, education and communications.

“From the next-generation Principal Real Start onboarding experience and Retirement Wellness Score to the robust Retirement Wellness Planner, all capabilities are tailored to the participant,” Schaaf says. “Customizable features on the website enable participants to build a retirement savings dashboard that supports their priorities and outline a path to reaching goals.”

Schaaf further emphasizes how the combined platform will enable retirement specialist advisers and consultants to do more to help improve participants’ financial confidence and retirement readiness. Advisers can leverage detailed reports generated out of the participants’ online experience.

“Together, these capabilities will enable an optimal experience for plan sponsors and participants and furthers the Principal focus on customer care,” Schaaf suggests.

The enhancements to the Principal platform are expected to be available in 2020 and coincide with the transition of Wells Fargo IRT clients to the Principal platform. Upon completion of the integration, Schaaf says, Principal will have a stronger and more efficient and flexible technology offering for all Wells Fargo and existing customers.

“We remain 100% focused on bringing the best people, processes and technology together for plan sponsors and participants. Obviously this announcement is an important milestone but there is work left to do. In the remainder of 2019, we will continue to make these enhancements to the technology platform, and then throughout the late part of this year and throughout 2020 we will start working with plan sponsors on specific migration plans for them,” Schaff adds. “The idea is that the actual migration will occur sometime in 2020, depending on plan sponsors’ needs. We are very confident in the ability to migrate plan sponsors and participants in a way that is really seamless and provides for great continuity of service and customer experience.”

According to Schaaf, this means that from the plan sponsor perspective, there will be no change to the service team, no payroll formatting changes, and no losses of transaction history or other critical records. She says additional information about the transition can be found at https://www.principal.com/betterretirement.

“We will do everything we can to make this a non-event for plan sponsors and participants,” Schaaf concludes.

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