Managers of 401(k) and similar workplace retirement plans are putting an increasing amount of money in private real estate investments, including commercial real estate funds and real estate investment trusts. This news comes according to a 2023 survey from the Defined Contribution Real Estate Council. In fact, as of Dec. 31, 2022, $59.1 billion was invested in private real estate by corporate, public and 403(b) defined contribution plans, which represents nearly 5% of all private real estate assets under management (AUM), a sizeable percentage.
Do you have questions about saving for retirement and managing your 401(k)? Speak with a financial advisor today.
Investment Decisions 401(k) Plans Are Making
Unlike the rosters of stock and bond mutual funds that 401(k) plans offer, workers putting cash into 401(k) plans won’t see these real estate investments listed in their menu of choices. Instead, the real estate holdings are investments that make up part of target-date funds and other similar products that invest at least a portion of their assets in real estate or alternative investments.
The move to private real estate is part of a larger effort by investment managers to diversify beyond individual stocks and bonds, and into assets that can offer potentially better investment gains or increased stability. Other alternative investments include commodities, timber, metals and other options that aren’t typically offered as directly to individuals.
How Might This Affect Your 401(k) Portfolio?
Individual plan participants can get a sense of how much real estate is included in their investments by digging through the details of the individual prospectuses of the funds they’re invested in. These are available from the company offering the fund, or by looking up the fund’s particulars at sites such as Morningstar.
Beyond funds, individuals who want to invest in real estate can do so through a number of different methods. These may include the following:
- Self-directed IRA
- Solo 401(k) or Roth Solo 401(k)
- Standard taxable investment account
- Purchasing your own real estate assets, such as rental properties
Individual investors who own homes may already have significant assets invested in real estate and might want to avoid further real estate exposure. In other words, think very carefully before deciding to invest in something as major as real estate.
Another option is to invest in a real estate investment trust (REIT) through a mutual fund or exchange-traded fund (ETF). REIT funds typically own income-producing properties or own the mortgages on those properties. REITs often specialize in a certain type of property, although you can also find hybrids that offer a mix of investments. While very few 401(k) plans offered REIT funds as an option in years past, some plans now offer them.
Bottom Line
Private real estate funds are being invested in by an increasing number of 401(k) and other defined contribution retirement savings plans. Real estate can serve as a hedge against inflation and as an alternative asset that can provide stability against the volatility of stock and bond funds. However, as with any investment, there are plenty of potential downsides and risks to making these types of investments as well.
Retirement Planning Tips
- A financial advisor can help you build a plan for retirement. Finding an advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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