There's a new idea meandering through Washington, the thought that federal workers should be allowed to invest retirement savings in the real estate sector.

Under the proposed Real Estate Investment Thrift Savings Act (H.R. 1578), 3.4 million federal workers would be able to use retirement savings to purchase shares in a real estate index fund. If you believe that investors should have a wide range of retirement options, then you have to ask: Why not?

At this time, says Jay Hyde with the National Association of Real Estate Investment Trusts (NAREIT), the federal Thrift Savings Plan (TSP) allows workers to invest in five index areas: corporate bonds, government securities, international stocks, small cap stocks and large cap stocks. An index which reflects REITs means merely that workers would have a sixth choice.

Under the proposal, federal workers could place funds in a real estate index or not, as they prefer. However, by excluding a REIT option workers have no choice and no choice seems entirely unfair given that commercial real estate is a well-known and established investment vehicle.

In general terms, REITs can be seen as businesses that hold or finance large income-producing properties such as office buildings, hotels, apartment complexes and malls. There are "equity" REITs -- those that buy and hold property, "mortgage" REITs -- those that finance commercial properties, and "hybrid" REITs -- those that do some of both. Most REITs fall into the "equity" category.

REITs can generate income from rent, interest and the sale of property. As well, the value of REIT shares can rise or fall with the marketplace.

To be a REIT, an entity is required to distribute at least 90 percent of its potentially-taxable income. Such distributions cause some investors to liken REITs to bonds rather than stocks.

Those distributions, in turn, have pleased many investors:

"As of the first quarter of 2004, REIT dividend yields were 5.5 percent on average, versus 1.8 percent for stocks in the S&P 500," says Hyde.

In the private sector, many retirement plans involve real estate investments. Defined benefit plans, often huge pension programs, routinely own or finance major real estate developments and purchase REIT shares. Defined-contribution plans such as 401Ks often, but not always, allow the direct purchase of REITs.

Because of risk, many investors prefer to diversify their holdings. If a wide range of investment choices are to be favored as a matter of principle, then why not allow civil service, postal and military personnel to use retirement funds for the purchase of a REIT index?

In no case is anyone being forced to accept the REIT index option. Federal workers will have an absolute right to consider the pros and cons associated with REITs and to just say no if that's their preference.

The real question ought to be why a REIT index has not been available to federal workers as part of the retirement mix. Figures from NAREIT show that between 2000 through 2004, "the average annual total return for REIT stocks was 22.2 percent."

As they say on Wall Street, past performance does not guarantee future results. Alternatively, federal workers had no access to such past results because of the way retirement plans have been organized to this point. That should change.

For more articles by Peter G. Miller, please press here.

Published: April 19, 2005

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