An important legislative issue for the commercial real estate industry, one that could affect literally millions of small real estate investors, was the subject of a recent hearing on Capitol Hill. The question on the table is whether the inclusion of a REIT fund option would enhance the Thrift Savings Plan, the federal retirement savings program for civil service, postal and military personnel. Some 3.4 million small investors participate in the plan, which operates much like a 401(k).

Currently, the Thrift Savings Plan offers a menu of five investment funds vs. an average of 16 for the typical 401(k) program. In the private sector, four of the six largest 401(k) plans now offer a real estate fund option.

Congressman Jon Porter (R-Nev.), chairman of the Subcommittee on the Federal Workforce, emphasizes that investors increasingly are looking at ways to diversify their assets. Expanding the Thrift Savings Plan to include a REIT-based fund would serve as a recruiting tool, adds Porter, co-sponsor of a bill supporting the REIT option.

One of the most compelling arguments for including this sixth option is the historical financial performance of REITs. Average total returns for the Equity REIT Index registered 14% from 1988 through 2004, according to the National Association of Real Estate Investment Trusts (NAREIT). From 2000 through 2004, average total returns soared to 22.4% as the chart shows. By comparison, the performance of the Thrift Saving Plan's C Fund, which invests in the common stocks of large corporations, averaged returns of -0.8% from 2000 to 2004.

Steven Wechsler, president and CEO of NAREIT, appeared before the subcommittee on April 19, to champion the legislation. “For decades, traditional pension plans, also known as defined benefit plans, as well as endowments and foundations, have included a distinct allocation to commercial real estate in their investment portfolios,” Wechsler told the committee.

For example, the nation's largest public defined benefit plan, CalPERS, reports a real estate allocation of 7.5%. And General Motors, which has the nation's largest corporate defined benefit plan, reports a real estate allocation of 8%.

Most of the 3.4 million participants in the plan aren't as sophisticated as Wechsler regarding the finer points of REITs. The eyes of even the most knowledgeable real estate investors can glaze over when analysts talk in detail about funds from operations, a commonly used measure of REIT performance. But even the average investor in the Thrift Savings Plan understands that a sixth option is in their best interest.