One way to improve retirement outcomes over time: add a mix of real estate to the traditional 60/40 portfolio. (Photo: Getty)

The U.S. continues to struggle to meet the retirement savings challenge.  According to a Vanguard study published earlier this year, the average 401(k) plan held a little more than $96,000 in assets in 2015; for the median plan, the number was just $26,400.  

A 2014 study by the Employee Benefit Research Institute found that about 40 percent of 401(k) plan participants had less than $10,000 in their accounts.

Estimates vary widely as to how much the average investor needs to have saved for retirement, but no matter which calculator one uses, these figures show a staggering gap between where people’s savings are now and where they will need to be when they stop working. 

Portfolio returns in a world of zero and near-zero interest rates pose yet another threat to long-term retirement security.  Study after study has suggested that both plan participants and plan sponsors may still harbor unrealistic return expectations. 

Related: New research wants REITs in TDFs

A recent paper from Research Affiliates found that a typical balanced fund with a 60/40 stock/bond blend had a zero chance of returning five percent or more over the next ten years.

But not all the news is quite so grim. The millennial generation does appear to be more inclined to save.

On the returns side, research from DCREC has found one way for sponsors and participants to improve retirement outcomes over time: add a mix of real estate to the traditional 60/40 portfolio.

Among the attributes that should make it attractive to DC plan sponsors, two in particular stand out: the ability to add diversification, and returns that generally demonstrate a low correlation to the broad equity market.

Historically, many institutional investors have included real estate in their investment portfolios to capture the potential diversification, lower volatility and income benefits of the asset class.  Typically, real estate allocations in these institutional portfolios include a significant component of direct, private market real estate combined with public REITs to maximize the diversification benefits.    

DC plan sponsors, benefit managers, and HR professionals are starting to take note of this. A survey of investment managers conducted last year by DCREC found more than $18 billion in daily valued real estate was held in DC plans (11 percent of that in public REITs). 

That number has almost certainly continued to grow, with more sponsors entering the marketplace and new products being introduced that are designed to meet the requirements of DC plans.

But a few key hurdles still slow widespread adoption of allocations to direct real estate in DC investment portfolios, with daily valuation policies and liquidity considerations at the top of the list.

Private real estate holdings typically include office buildings, office properties, warehouses, and multi-family residential. These properties don’t change hand on a daily basis. That can make them more difficult to value, which in turn can impact the frequency of liquidity. 

To address this, DCREC has implemented an ongoing evaluation of the best practices and industry standards that are evolving around real estate product offerings for the DC market, including those pertaining to the valuation of daily-valued products with direct real estate strategies.   

DCREC put together a summary of its research and evaluation including “10 Key Principles” for daily valuation, with the intent of establishing a guideline for industry-wide best practices.  They include the following:

  • Third party appraisal.  All properties should be appraised periodically by an independent, external appraiser to establish a baseline valuation. 

  • Recognize material events on a timely basis.  The process should include a mechanism for the timely recognition of material events.  These should be reported to the appraiser who can then assess the impact (if any) on property valuation.

  • Recognition of net income accrual.  Income is a key component to overall real estate returns. Daily accrual of net income is critical to maintaining accurate valuations.

  • Intra-quarter valuation updates.  This provides for timely valuation adjustments based on cash flow, expenses, property-level and market events, and a rolling appraisal process that incorporates new appraisals as they are completed.

  • Clear internal roles and accountability.  Transparency and accountability are vital to establishing an effective valuation process.  All parties should have clear, well defined responsibilities for monitoring properties and communicating material changes.

Many of the product offerings providing access to direct real estate in the DC market today have implemented valuation policies and procedures which follow these best practices. The combination of an effective daily valuation policy and the availability of other liquidity sources (publicly-traded REITs, cash, for example) in such daily-valued real estate products should go a long way to addressing the liquidity concerns of both plan sponsors and participants. 

A significant, but perhaps undervalued, benefit is the tendency of private real estate to reduce portfolio volatility, in part through its historically low correlation to equities and its income-generating ability. Research from DCREC (and many others) has highlighted the importance of diversification and reducing volatility in forwarding the ability of DC plan participants to achieve their goals. 

This is especially important in the later phases of accumulation and the transition to retirement. Excessive portfolio volatility during this period may stimulate more trading as investors try to time the market in ways that often negatively impact returns. 

Our research has found that a real estate allocation of as little as 10 percent – drawn equally from the stock and bond sides of a portfolio – can help reduce overall portfolio volatility. 

Further, it can do this while achieving outcomes similar to those expected from comparable portfolios without real estate, while improving tail risk characteristics.  The end goal success is generally similar to that achieved by non-real estate alternative portfolios, but with a smoother path to the end goal.

Institutional investors have, on average, historically allocated up to 10% percent of their portfolios to real estate. For DC plan sponsors (and participants) to move towards similar allocation levels, they will almost certainly have to become more comfortable with the investment considerations and best practices that are being established in the market today.   

We encourage DC plan sponsors, benefit managers, and HR professionals to utilize the research and best practices resources available at This website  also includes a checklist tool for evaluating DC real estate product offerings which can act as a roadmap for those considering adding, or expanding their exposure, to this important asset class.