Paper Gives Guidance About Structuring Real Estate Investments in DC Plans

The Defined Contribution Real Estate Council (DCREC), an advocacy group promoting the inclusion of direct commercial real estate and real estate securities as a way to improve define contribution (DC) retirement plan outcomes, has published “Direct Real Estate in DC Plans: 10 Key Principles for Product Structure and Investor Eligibility.”

Research by Callan Investments Institute indicates DC plans primarily get real estate exposure through publically traded real estate investment trusts (REITs) as part of asset allocations within target-date funds (TDF)s. However, research by consulting firm Casey Quirk, a practice of Deloitte Consulting, reflects that recently there’s been a transition from REITs and other publically listed real estate exposures to direct real estate.

The 10 key principles discussed in the DCREC’s paper include:

• 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;
• A DC Direct Real Estate product should be structured as a tax-exempt entity or a vehicle that issues an Internal Revenue Service (IRS) Form 1099 for tax reporting to minimize the administrative burden to plan fiduciaries and recordkeepers;
• A DC Direct Real Estate product should utilize a structure that reduces unnecessary regulatory, operational and administrative expenses, while still providing an appropriate level of regulatory oversight and investment disclosure;
• A DC Direct Real Estate product should be tailored to the needs of DC plan investors;
• Regardless of the product structure or regulatory oversight, a real estate DC product should offer strong investor regulatory protections;
• A DC Direct Real Estate product that invests through a fund-of-funds structure should provide transparency at all levels;
• DC Direct Real Estate product investor eligibility (including whether plan participants are permitted to invest directly as a stand-alone or core investment option in their plans) should be determined in light of the liquidity, and applicable tax and securities law limitations;
• If a DC Direct Real Estate product is offered as a standalone investment option for individual participants in a DC plan, plan participants should understand the liquidity constraints and other unique risks and considerations;
• If a DC Direct Real Estate product is offered to individual participants, plan fiduciaries could consider grouping the investment as part of a multi-product category (e.g., a real asset bundle) to reduce illiquidity risks that may arise from a particular product; and
• DC real estate products that utilize a fund-of-funds structure and where the investment fiduciary for the product is an affiliate of the underlying investment manager, should not have fees that are contingent on underlying investment allocations.

“We continue to see increased investment and growing interest in adding direct real estate to DC plans, often with the goal of bringing real estate’s diversification and income benefits to target-date funds and other multi-asset retirement portfolios,” says Michael O’Connor, co-chair of DCREC’s Best Practices Committee. “The preparation of this latest white paper fits with our DCREC organizational goals of developing best practices for the inclusion of real estate as an asset class in retirement plans and improving participant outcomes. We welcome industry feedback on this piece and other collaborative white papers that we have made available on our DCREC website.”