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U.S. MIGHT ADD REITS TO FEDERAL PENSION PLAN

Many stability-seeking investors compare REITs favorably to U.S. government securities. Now the federal government itself may start looking to REITs increasingly for healthy returns going forward.

Some in Congress say the Thrift Savings Plan, or TSP, a retirement plan for U.S. government workers and military personnel, should diversify more. In April Reps. Tom Davis, R-Va., Jon Porter, R-Nev., and Chris Van Hollen, D-Md., introduced the REITs Act, which would add a REIT fund option to the TSP.

With about $152 billion in assets, the TSP is the country’s largest defined contribution plan. In such a plan employees elect to invest a part of their salaries and bear some risk. Launched in 1986, TSP is similar to the private sector’s 401(k) option.

Proponents of adding a REIT fund say that because the REIT sector has such consistently strong earnings, it is the most logical choice for a plan that needs to offer participants more variety.

“The average private-sector [investment] plan offers 16 options,” said Chad Bungard, chief counsel and deputy staff director for the House Subcommittee on the Federal Workforce and Agency Organization. The TSP offers just five.

If accepted, the REIT fund would be indexed, or pegged, to one of several REIT composites, such as those maintained by Morgan Stanley or the National Association of Real Estate Investment Trusts (NAREIT), says Bungard.

Some of the largest corporate 401(k) plans offer a REIT index fund. IBM, whose IBM Savings Plan has $25 billion in assets, a quarter million participants and an average balance of $100,000, added a REIT index fund two years ago, said R.L. Vivian, an IBM managing director, at a House hearing on the issue in April.

“We are committed to REITs as a core asset for defined contribution plans,” Vivian said. “Their return volatility, diversification, dividend yield and taxation characteristics make the case.”

But despite such support from government officials and private-sector professionals alike, the Federal Retirement Thrift Investment Board, which administers the TSP, is resisting. The board argues that the timing is off.

“It is essential that we focus participants’ attention on the Lifecycle Funds that we are introducing this summer,” said Andrew M. Saul, the board’s chairman, during the house hearing.

Further, introducing a REIT-specific fund breaks with the traditional TSP method of using funds that span several asset classes, says Saul. If diversification is what proponents are after, they should also consider commodities, emerging-market stocks and high-yield debt, all of which are totally unrepresented in the TSP menu of choices.

Besides, Saul says, TSP participants already invest some $1.1 billion, about 0.7 percent of total assets, in REIT securities through the plan’s comprehensive index investment funds.

“A separate REIT fund would, for the first time, expose TSP participants to overlapping investment choices,” said Saul. Congress should carefully consider the impact of offering funds that focus on individual asset classes when it has already approved a broader-based method of investing, he says.

TSP’s 0.7 percent real estate allocation is minuscule compared to what state government employees are investing in real estate, Steven A. Wechsler, president and CEO of NAREIT, told the subcommittee. The Public Employees’ Retirement System of Nevada, for instance, had a real estate allocation of 8.7 percent as of last September. The California Public Employees’ Retirement System reports that 7.5 percent of its $168 billion in assets was invested in real estate as of that same period.

“Such a limited allocation,” said Wechsler, “simply does not provide plan participants with a meaningful or beneficial exposure to commercial real estate.”