Real Estate in DC Plans: Key Considerations

Lew Minsky, with DCIIA, reviews questions defined contribution plan sponsors should ask when considering real estate investments for their plans.

Real estate is a major industry and a significant asset class in size and scale when compared to the U.S. equity and fixed income markets. It can be accessed through both public, listed markets (e.g., real estate investment trusts) and private markets. It provides exposure to hundreds of thousands of structures across diverse property sectors including retail, residential, office, industrial, health care, self-storage and hotels.

The National Association of Real Estate Investment Trusts notes “specific, well-documented attributes of real estate investment, including:

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  • A distinct economic cycle relative to equities and bonds due to supply inelasticity, which reduces the correlation of investment returns from real estate with the returns from other assets,
  • Competitive, long-term investment returns that potentially provide high and growing income from rents plus moderate capital appreciation over time,
  • Portfolio diversification benefits within equity and bond portfolios, and
  • Potential inflation-hedging attributes due in part to the fact many leases are tied to inflation and that real asset values tend to increase in response to rising replacement costs.”

Historically, defined contribution plans have primarily accessed real estate through public REITs, often within target-date funds. Listed REITs are public companies that specialize in owning and operating commercial real estate. They trade on exchanges and are available in active and passive mutual funds and exchange-traded fund vehicles. They generate returns through the collection of rent and capital appreciation of property values, and return most of their income to investors in dividends. In recent years, more multi-asset “real asset” funds, which often include REITs, have been offered.

Direct real estate investing involves ownership of physical properties such as office, retail, apartment and industrial buildings, where management acquires and administers properties, and the investment of funds for capital improvements, tenant improvements and leasing commissions.

There is growing support and interest from DC plan fiduciaries for daily-valued private real estate offerings. There are approximately 16 daily-valued solutions totaling roughly $50 billion available, and additional product launches are expected. Some retirement income solutions are evolving to include private real estate. There is also emerging interest in private real estate debt.

Callan’s DC Index shows the prevalence and average allocation of various asset classes over time. The average allocation to real estate has held relatively steady since 2010 (with a range of roughly 1.0% to 2.3%), but the prevalence of real estate within DC plans has grown over time to 22.8% as of December 31, 2021.

In the “Defined Contribution Survey 2021,” the Defined Contribution Real Estate Council, the National Association of Real Estate Investment Managers, and Ferguson Partners note that “Interest in investing in real estate by DC investors is rising, with the median AUM of an investment manager managing dedicated DC real estate strategies increasing more than 50% over the past five years, and overall AUM increased 24%.

DC investors have grown more sophisticated in their knowledge of the real estate asset class and many are looking closer at asset-level and manager performance. Almost 33% of DC investors invest with multiple managers, a sign of comfort with real estate as an asset class and increased sophistication of investors.”

Key questions when considering real estate investments might include:

  • Are the investment merits worthwhile?
  • Do the fees justify the potential outcomes?
  • What are the liquidity and valuation characteristics of this investment?
  • Where would this fit into a DC plan structure?
  • Should target-date funds or multi-asset funds be used; what type of implementation best fits?
  • Should we use REITs or private markets, or both?
  • Who will provide oversight of this investment? Should we hire someone?

In 2017, DCREC published a paper outlining 10 tips specific to considering direct real estate investments in DC plans, suggesting that a DC Direct Real Estate product should:

  • “accommodate the unique considerations that are important to DC plan fiduciaries, such as investor eligibility, regulatory oversight and tax reporting;
  • be structured as a tax-exempt entity or a vehicle that issues an Internal Revenue Service Form 1099 for tax reporting to minimize the administrative burden to plan fiduciaries and recordkeepers;
  • utilize a structure that reduces unnecessary regulatory, operational and administrative expenses, while still providing an appropriate level of regulatory oversight and investment disclosure.”

For additional data and details regarding real estate and other investment options in DC plans, please see DCIIA’s February 2022 report, “Alternative Investments in DC Plans” and its 2017 report, “The Role of Real Estate in DC Plans,” or visit the “Investment Options and Best Practices” topic in our Resource Library.


Lew Minsky is president and CEO of the Defined Contribution Institutional Investment Association (DCIIA).

This feature is to provide general information only, does not constitute legal or tax advice and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services Inc. (ISS) or its affiliates.