1. New Sources of Capital from Target Date Funds
Steven Chudnow
Prudential Real Estate Investors
Steven Kapiloff
UBS Realty Investors
John Noell
Mayer Brown
Lennine Occhino
October 17, 2012
National Association of Real Estate Investment Managers

2. What is a defined contribution (“DC”) plan?
Participants fund contributions
Risks of investment return on participants
Participants direct investment of their own accounts

3. DC Terminology
401(k) – Internal Revenue Code § 401(k)
404(c) – Internal Revenue Code § 404(c)
CIT – bank collective investment trust
DB – defined benefit
DC – defined contribution
ISA – insurance company separate account
QDIA – qualified default investment alternative
RIC – registered investment company

4. Pension Trends and Drivers
DB plans maturing and cash flow increasingly negative
DB underfunding
Disincentives to funding
Investment losses
Maturing participant population
Accounting rule changes requiring pension liabilities to be reflected on corporate balance sheet

5. DB  DC Migration of Pension Assets
DOL statistics indicate that between :
Total private pension assets grew from $377 billion to $3.5 trillion
The percentage attributable to DC plan assets increased from 27% to 51%
Investment Company Institute:
DC assets grew 6,100 percent over a ten-year period

6. 2006 Pension Protection Act
2006 change in law to facilitate auto enrollment of employees in DC plan
Established new fiduciary safe harbor for “QDIAs” as 401(k) default option
QDIAs must be appropriately diversified (typically target date, balanced or lifestyle funds)
QDIA managers include:
External management firms
Internal management professionals

7. Projected Growth of Target Date Funds in DC Plans
Investment Company Institute:
By the end of 2015, 35% of all DC assets in a target date type product
Cerulli Associates:
Target date funds in DC plans will grow from $426 billion in to $1.5 trillion in 2015
Casey, Quirk & Associates:
Target date funds will swell to $2.6 trillion by 2018 from $311 billion in 2008

8. DC Real Estate Opportunity
Through target date strategy, DC portfolios aligning with DB portfolios
Callan Associates 2009 survey:
73% of target date fund managers had a dedicated real estate allocation
PIMCO 2009 Defined Contribution Trends Survey:
U.S. consulting firms promoting diversification and inflation hedging in DC plans
Casey, Quirk
DC plan sponsors concerned that current target date asset classes insufficient to address longevity, market volatility and inflation risks

9. DC Investor Categories
Plan participant
On behalf of 401(k) account
Internally-managed portfolio
On behalf of plan
Externally-managed portfolio
Externally-managed fund
RIC
CIT
ISA
Private DC fund of funds

10. Traditional DC Investment Vehicles
Bank CITs
JPMorgan
Insurance company separate accounts
Principal Life
TIAA
Public REITs
Registered investment companies
Limited to liquid assets

11. New Twist on DC Investment Vehicles
DC Friendly Fund
Investors
RICs
REITs
CITs
ISAs
Externally-managed plan accounts
Internally-managed plan accounts
DC fund of funds GP
Manager (RIA)
Features
Open-end
Daily valuation
Daily liquidity for participants
Quarterly liquidity for plan LP
Core funds
Liquidity
Cash
Credit line
Public REIT stocks
Specialty funds
Direct real estate

12. New Twist on DC Investment Vehicles
DC Eligible Fund
Investors
CITs
ISAs
Externally-managed plan accounts
Internally-managed plan accounts
Participants
Bank Trustee or Insurance Co
Manager (RIA)
Features
Open-end
Daily valuation
Daily liquidity for participants
Daily liquidity for plans
CIT or ISA
Core funds
Liquidity
Cash
Credit line
Public REIT stocks
Specialty funds
Direct real estate

13. New Twist on DC Investment Vehicles
Parallel DC Friendly/DC Eligible GP
Manager (RIA)
Bank Trustee LP
CIT
Liquidity
Cash
Credit line
Public REIT stocks
Core funds
Specialty funds
Direct real estate

14. Limited Partnership
Bank CIT
Insurance Co. Separate Account
Unlisted REIT
Tax Status
Partnership/flow-through
501(a) tax exempt bad income blocker
Annuity converts bad income
REIT
ERISA Status
ERISA plan assets
Not ERISA plan assets
Securities Law Exceptions
Reg D under ‘33 Act
3(c)(7) ‘40 Act
3(a)(2) ‘33 Act
3(c)(11) ‘40 Act
‘33 Act/‘34 Act registered
Falls outside definition
Registration/Approvals
None
Must be approved by state insurance regulator
Registered
Investor Eligibility
Externally-managed plan portfolios
Internally-managed plan portfolios
RIC
CIT
ISA
DC fund of funds
Plan participants
Externally-managed portfolios
Internally-managed portfolios
Other Considerations
Unit not transferrable – only redemption permitted
Bank trustee must maintain overall investment control
SEC focus on abuse
Very inexpensive and easy to establish
OCC mandates redemption payout within one year
Investors hold annuity contract rather than direct fund interest
Insurance company remains as intermediary with investors
No parallel vehicles for other investor categories
No “investor control”
Expenses high due to registration
Ongoing public reporting

15. DC Investment Issues Liquidity Daily pricing
Plan participant driven – daily
Event driven – reasonable accommodation
RIFs
Corporate transactions
Plan design changes
Plan fiduciary driven – quarterly
Investment option changes
Daily pricing

16. What to ask a Real Estate Manager
Liquidity Management Managing cash flows and liquidity needs of TDF Managers and Plan Sponsors
Plan
TDF
15% to 40% of Plan Assets
Real Estate 5% to 15% Allocation
Private Direct Property
60-100%
Cash/REITs
0-40%
Credit Line
5-15%
Factors to Consider
TDF Cash Flow
Rebalance methodology
Events that may trigger a material change in cash flows; i.e., reenrollment, new participant enrollment, plan design changes
What to ask a Real Estate Manager
Are there liquidity queues to get in and/or out of private real estate?
Does the manager deploy a multi- fund approach or single strategy?
Utilize line of credit or back stop to guarantee liquidity

17. Liquidity Versus Optimal Allocations
Liquidity Range
100%
Publically Traded REITs 0%
Private Direct Property
Cash/REITs
20-40%
Direct Private Property
60-80%
Optimal allocation to produce desired outcome in TDF
Trade off between liquidity and optimal allocation
What is the real liquidity risk?

18. Daily Valuation: “30,000 Foot View”
Record keeper determines NAV
C-TDF
DC RE Fund
Overall Fund NAV determined by custodian
NAV determined by RE Manager and/or 3rd Party
NAV determined by fund(s)
Private Real Estate Fund(s): %
Liquidity Components: 0-40%
(REITs and/or cash) +

19. Valuation Methodologies Range of Approaches
Valued In-house
Partially outsourced to 3rd Parties
Valued by 3rd Parties
Individual property appraisals
Appraiser review process at Fund level
Intra-quarter changes; capital deployed, extra-ordinary revenue/ expenses
Net operating income and changes thereto
Transparency
Integrity of the internal model
Frequency of change
Conflicts of interest
Organizational confidence in change notification process
Materiality levels
Frequency of change
Strength of market database
Organizational confidence in change notification process
Access to accounting records of manager

20. DC Sponsor Considerations
Liability for plan participant investment decisions
404(c)
QDIA
Participant education
Fees/costs
New participant-level disclosures of fees and expenses
DOL, Congressional focus on excessive DC costs
Zero UBTI tolerance
Recordkeepers must add fund to platform
DC Real Estate Council