Is the Time Right for REITs? Consider Adding These Funds to Your 401(k) Investment Option List to Help Workers Reach a Sunnier Retirement. (Compensation Benefits Agenda)

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Employees are getting used to opening up their 401(k) statements each quarter and seeing losses. The equities market--where the bulk of 401(k) plans are invested--has been on a downward track for a couple of years.

But 401(k) participants looking for ways to help stem those losses may he interested in a little-known and underused investment that has been posting consistent gains in this down market--real estate investment trusts (REITs), vehicles that essentially securitize the owning and/or operating and/or financing of real estate. A REIT mutual fund specializes in owning publicly traded REITs.

However, few 401(k) plans offer any kind of real estate investment option--approximately 6 percent of plans in 2000, according to the Profit Sharing/401(k) Council of America (PSCA) in Washington, D.C. And the amount of money invested overall in real estate is extremely small, says David Wray, PSCAs president--less than 0.1 percent of all assets in all plans.

Evan Miller, a partner at the Washington, D.C., law firm of Hogan & Hartson LLP, notes that a majority of 401(k) plans are heavily weighted toward domestic equity funds. "It's not unusual for companies to offer an option mix that could have 12 to 15 investment options, most being mutual funds invested in domestic equities," he says.

But that may change. Wray says 401(k) plan sponsors are beginning to express an interest in adding REITs to their plans as a way to help participants diversify in this choppy market.

Ibbotson Associates, a Chicago-based investment consulting firm, is one of those plan sponsors that recently looked into REITs--after seeing the results of its own study on these investment trusts in 401(k) plans, a study requested by the Washington, D.C.-based National Association of Real Estate Investment Trusts (NAREIT). The study showed that adding REITs to a wide selection of diversified portfolios from 1972 to 2000 boosted compound annual total returns by as much as 0.8 percent compared with non-REIT portfolios. "We …