Certified Plan Sponsor Professional (CPSP) Practice Exam

What are some challenges associated with direct investment in real estate as an asset class in a qualified retirement plan? (Select all that apply)

1. Valuation

2. Taxation

3. Liquidity

4. Potential for high returns

The correct answer is: Valuation

Direct investment in real estate poses several challenges as an asset class within a qualified retirement plan, with valuation being a notable concern. In this context, valuation refers to the difficulty in determining the current market value of real estate assets. Unlike publicly traded securities, which have readily available pricing information, real estate transactions can be influenced by various external factors such as local market conditions, the condition of the property, and comparable sales. This can make it challenging for plan sponsors to accurately assess the value of real estate holdings, which is crucial for ensuring the proper accounting and reporting of the plan's assets. While challenges like taxation and liquidity are also significant considerations in the direct investment of real estate, they are not part of the selected answer. Tax implications can vary depending on factors such as rental income and property sales, while liquidity typically involves the ability to quickly convert assets into cash without affecting their market price. The potential for high returns is often associated with real estate investments, and while this can be seen as both an attractive feature and a risk, it does not directly relate to the challenges faced in this context. Overall, the complexities surrounding the valuation of real estate assets highlight why this aspect is critical for plan sponsors to understand when considering their investment strategies within qualified retirement plans