Bill widens pension options

But critics think real estate is risky for federal workers

May 14, 2006|By MELISSA HARRIS | MELISSA HARRIS,SUN REPORTER

A proposal before Congress that would add a real estate fund to federal workers' $186 billion retirement investment plan - the largest of its kind in the world - has attracted a frenzy of lobbying from commercial real estate interests and warnings from critics who say it is too risky.

The fund consists of stock-like investments known as real estate investment trusts, or REITs, a way for small investors to hold a stake in big hotels, apartment buildings, office complexes, shopping malls and other commercial property. Supporters say investors can reap enviable profits and diversify retirement savings.

The federal retirement plan's top staff members and a five-member board of investment experts appointed by the president oppose the idea. They say that adding a REIT fund to the mix of investments offered to employees and retirees would confuse them and subject those choosing the fund to higher fees. Real estate might be hot now but has an uncertain future, they say.

Despite those concerns, 174 members of Congress have signed on to a bill that would add REITs to the investment choices offered to federal workers. Among the sponsors are most members of the Maryland delegation, among whose constituents are 375,000 plan participants. The federal government is Maryland's largest employer.

The federal 401(k)-style plan, which has 3.6 million investors worldwide, including members of Congress, includes five options. Lawmakers have tried to expand it several times, proposing such things as more investment in gold and silver and a "corporate responsibility" fund that would shun polluters.

The addition of REITs would mark the first time that Congress had added an investment option dedicated to one industry, rather than broad-based funds that buy stocks in a variety of industries.

Supporters, including Rep. Chris Van Hollen, a Maryland Democrat and one of three primary sponsors, say federal workers should have a chance to profit from the strong real estate market.

"REITs are a major presence in Maryland," said Van Hollen, who is joined in his support by fellow Maryland Democratic Reps. Steny H. Hoyer, Benjamin L. Cardin, C.A. Dutch Ruppersberger, Elijah E. Cummings and Albert R. Wynn. "I represent a lot of federal employees and a lot of people involved in REITs. This is a win-win situation for both groups."

Others are more skeptical.

"Any time politicians are adding funds to a retirement portfolio, there is reason to be concerned," said Sylvester Scheiber, a vice president at Watson Wyatt Worldwide, a benefits consulting firm. "There is absolutely no reason for the U.S. Congress to be making decisions about investment options for federal employees."

Publicly traded

REITs are publicly traded companies that invest in commercial, industrial and multifamily residential properties. They are required to pay out virtually all of their annual income to shareholders and don't pay corporate income taxes on the distributed amount.

The addition of a REIT fund would be a coup for the industry, opening doors into private-sector 401(k)s, whose managers consider the low-cost federal plan an industry model. President Bush has called it a roadmap for privatizing Social Security.

After two hearings, the bill awaits a vote in the House Government Reform Committee. An identical bill with one sponsor is pending in the Senate.

The federal plan's managers and Congress have rebuffed all such efforts from interest groups.

In the late 1980s, some members of Congress wanted the plan to exclude companies doing business in Northern Ireland and South Africa. In 2003, a gold-loving congressman proposed a fund that would invest solely in precious metals. And last year, a member floated the "corporate responsibility" idea.

In the mid-1990s, after being approached by Baltimore pension fund manager Nathan A. Chapman Jr., members of the Congressional Black Caucus pushed for a fund that would invest in businesses owned by minorities and women. Chapman failed on the federal level but won an investment role in Maryland's state worker pension system.

(A jury convicted him of fraud in 2004 for using the pension money to buy stock in his own company, which then lost more than $5 million. Chapman has appealed.)

In another case, interest groups representing the real estate industry tried to have mortgage-backed securities added to the plan when it was formed in the late 1980s. That also failed.

The REIT industry's political action committee has donated more than $2.9 million to the two major political parties, members of Congress and their political action committees and to candidates for federal office since 1997, the earliest year for which electronic records are available.

A little more than $1 million of that has been given to 117 sponsors of the current retirement plan legislation and their political action committees. The remaining 57 sponsors did not receive donations from the group.

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