The recent Enron debacle and the dismal performance by the major U.S. stock indexes over the past two years have prompted many investors to carefully review their self-directed retirement plans. Many are rediscovering the basic investment principle of diversification. This presents a tremendous opportunity for the public real estate industry as NAREIT continues the drive to raise the profile of real estate securities as an attractive investment alternative offering significant diversification benefits in a balanced portfolio. The objective is to increase both the number of investors and the amount of capital allocated to public real estate securities.

The cornerstone of this program is the promotion of real estate securities as an investment option for 401(k) and other tax-deferred defined contribution plans. Those investors who enjoyed phenomenal returns by investing solely in high-growth stocks in the late 1990s have seen much of their gains wiped out in the last two years. This has been particularly true with 401(k) plans. Studies have shown that 401(k) plans are under-performing traditional pension plans by as much as two percentage points annually, largely due to the lack of investment diversification.

This lack of diversification is, in part, due to the investment choices made by plan participants. But another, prevailing reason is that those individuals who want to fully diversify their investment accounts are unable to do so because a complete set of options from which a fully diversified portfolio can be built is not available to them. Many 401(k) plans offer a variety of stock and bond investment options, yet a real estate option—one of the best portfolio diversifiers—is virtually non-existent in most of today’s defined contribution plans.

A recent study by Ibbotson Associates demonstrated that adding real estate securities can raise the return and lower the risk of price volatility for almost any portfolio. The risk-adjusted returns and low correlation of real estate securities with that of other stocks and bonds offer significant diversification benefits to a balanced portfolio.

This year, NAREIT will be on the road meeting with 401(k) and other defined contribution plan sponsors, advisors and administrators to open the vast, untapped 401(k) marketplace to real estate stock investing. It’s a significant challenge, but the benefits for the industry—and 401(k) participants—are worth the concentrated effort. Your contributions and commitment are critical.

William D. Sanders
NAREIT Chair