Retirement board turns thumbs-down on REITs


April 22, 2005|By Melissa Harris | Melissa Harris,SUN STAFF

THE BOARD responsible for managing the federal government's retirement plan will oppose the addition of a real estate investment fund because it would cost too much and duplicate other investments in the plan's portfolio, the agency announced this week.

In testimony submitted to a congressional subcommittee Tuesday, the board's executive director, Gary A. Amelio, said that the Thrift Savings Plan already holds $1.1 billion in real estate investment trusts, called REITs, making it the nation's 13th-largest investor in such funds.

"The need is already met," according to Amelio's statement to the House's federal work force subcommittee.

REITs are companies that own and usually operate vast amounts of commercial property. A REIT fund would buy stocks in these companies as part of federal workers' retirement investment.

A booming real estate market and the trusts' large portfolios that compensate for poor-performing properties have made REITs a favored investment of the new millennium. The three members of Congress sponsoring the bill that would offer federal workers that option say the current choices are inadequate.

More than two-thirds of private companies offer 11 or more retirement plan options, compared with the federal government's five.

Federal workers' small business - or S - fund includes an 8.51 percent investment in REITs. But most federal workers don't invest all of their retirement benefits in one fund, meaning they likely wouldn't meet the 5 percent to 10 percent investment in real estate that Ibbotson Associates Inc., an industry expert, recommends.

But Dan McNeela, a senior real estate analyst at Morningstar in Chicago, warned that adding the option this year is not wise because investors are concerned that property prices "are too inflated."

Although REITs reaped more than 20 percent annual gains from 1999 to 2004, rising interest rates pushed them close to the bottom of all mutual fund categories during the first quarter of this year.

"Real estate is a good part of any retirement plan, but adding it right now, after a run of several strong years, it's just not the best time for the short-term," McNeela said.

Amelio also expressed concerns about the timing of the proposed changes, but for different reasons. The board is worried a real estate fund would interfere with its plans to roll out a new "lifecycle" program this summer.

Federal workers who invest in the lifecycle, or L, fund would be turning the management of their retirement plan over to a private company. The company would decide what percentages should be invested in the five other funds.

Younger employees would see more money go into riskier stocks, but as retirement nears investments would shift into safer options. Amelio also said that this expertise would be a wiser option for federal retirees than a real estate trust fund.

Some federal retirement fund investors "have demonstrated a tendency to chase returns, which likely could result in higher turnover rates for such a fund and higher transaction costs," Amelio said.

Veterans Affairs

A proposal to add nearly $1.9 billion for veterans' health care to a bill paying for continuing military operations in Iraq failed last week.

The U.S. Senate voted, 54-46, mostly along party lines, to reject the amendment for emergency money for the Department of Veterans Affairs. The two sides couldn't agree on whether the VA needs it.

Amendment sponsor Sen. Patty Murray, a Washington Democrat, said on the Senate floor that budget shortfalls are "crippling" veterans' health care and that the system is "underfunded," "overcrowded" and "short-staffed."

Sen. Kay Bailey Hutchison, a Texas Republican, responded that the agency is not in crisis, has adequate reserves and doesn't need more money. She then produced a memo from VA Secretary Jim Nicholson backing her up.

"The Veterans' Administration is telling us they have the money they need to fulfill this year's budget, and specifically to fulfill their needs," she said.

Reader feedback

A reader wrote expressing frustration over having to reapply for his security clearance when he retired from the military, despite the fact that he was remaining in the same job, only as a civilian.

"Nothing in my security clearances file changed that would have caused a cancellation or revocation had I stayed on active duty," he wrote.

It took almost eight months for him to get a new one.

Eldon Girdner, a spokesman for the Office of Personnel Management, said: "Security clearances are given on a need-to-know basis, and when you retire, you no longer need to know."

The writer welcomes your comments and story tips. She can be reached at melissa. or 410- 715-2885. Back issues of Federal Workers can be accessed at

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