Location, Location

A consulting firm has advised Thrift Savings Plan officials that adding a controversial real estate fund to the 401(k)-style retirement savings program is not a good idea, especially given the recent tumult in the capital markets.

At a monthly meeting on Tuesday, TSP officials presented the Federal Retirement Thrift Investment Board with a review by Ennis Knupp & Associates of Chicago that examined the possibility of adding a Real Estate Investment Trust fund allocation in the plan's life-cycle funds, which are a blend of the five basic funds that automatically grow more conservative as investors near retirement.

The TSP first came under pressure from Congress and the National Association of Real Estate Investment Trusts to add a REIT fund to the plan's five basic options in 2006. In October 2008, NAREIT pitched the idea of allocating a REIT index fund in the L funds.

But the latest review by Ennis Knupp was similar to the firm's 2006 analysis: REITs should not be offered as a stand-alone investment fund option in the TSP, nor should they be included in the options offered under the plan's life-cycle funds. This is especially true given the tough economy and collapse of the real estate industry, Ennis Knupp concluded, adding that REITs have become approximately twice as volatile as other major stock market indices during the 2008 economic downturn.

More volatility implies a greater degree of dispersion in an asset's return -- both on the upside and the downside, Ennis Knupp reported. The risk associated with REITs is measured as a standard deviation from the rate of return. REITs standard deviation of 41 percent means that an expected return of 10 percent in two or three years, for example, would yield a return of anywhere between a 31 percent loss and a 51 percent gain, TSP Chief Investment Officer Tracey Ray said on Tuesday.

"Overall, we believe the negatives more than outweigh the potential benefit of REITs," the report stated. "We recommend the FRTIB not offer REITs as an investment fund alternative."

Further, the market capitalization of the U.S. REIT market declined 52 percent, from $400 billion in 2006 to $192 billion as of December 2008, Ennis Knupp found. At $202 billion, the TSP's assets are greater than the market capitalization of the REIT market. "Large TSP transactions could influence the price of the REIT index, causing participants to pay more for purchases and receive less from sales," the report stated.

Ennis Knupp also concluded that the objective of the L funds is to provide a one-stop investment solution to TSP participants, and the key is to have funds be broadly diversified, low cost and easy for participants to understand. "Adding asset classes that are complex, smaller and/or less liquid and not offered as an individual investment fund option would work against these objectives," the report stated.

Stimulus Retirement Relief

Federal retirees were not left out of the $787 billion stimulus package President Obama signed into law on Tuesday. The law provides a refundable tax credit of $250 for 2009 for federal retirees under the Civil Service Retirement System, while retirees in the Federal Employees Retirement System are eligible for a one-time payment of $250.

House and Senate conferees reached agreement on the stimulus package last week after working out differences in their respective versions. Originally, only the Senate-passed bill included the $250 payments to retirees receiving Social Security, including those under FERS. That would have excluded non-Social Security public retirees, including many CSRS annuitants.

"This language will ensure that federal retirees who spent their lives in public service are provided the economic relief they have earned and deserve," said National Treasury Employees Union President Colleen Kelley on Friday.