SRI funds and your 401(k): what you need to know

Socially responsible investment (SRI) has existed for decades, but it has been slow to penetrate the employer-sponsored retirement plan market. This is partly due to an opinion issued by the Department of Labor (DOL) in 2008 stating that participants’ investment in socially responsible sectors should be “rare”. This opinion discourages many plan providers from offering these options to their participants. Since then, most SRI investments have been limited to retail accounts and IRAs.

But times are changing. DOL issued new guidelines in 2015, allowing trustees to use environmental, social and governance (ESG) considerations as a “decisive game” when comparing other equal investments.Recently, DOL updated its guidelines, acknowledging that trustees can proactively apply ESG factors when making investment decisions, provided they focus on economic value.

Wanted: a socially responsible alternative

In recent years, as retail investors and retirement plan participants have become more knowledgeable and experienced, the demand for investment options that reflect their values ​​has also grown. A survey conducted in 2017 by LGT, a bank and asset management group run by the Liechtenstein royal family, showed that 55% of plan respondents offered socially responsible investment options.The Sustainable and Responsible Investment Forum has shown that the sector’s asset base has grown rapidly in recent years: in 1995 it was US$639 billion; in 2007 it was US$2.7 trillion; in 2014 it was US$6.57 trillion and in 2016 it was US$8.72 trillion. In 2018, it was US$12 trillion. Such funds can screen companies based on various criteria, such as empowerment of women, morality/crime, environment, religious issues, etc.

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DOL approved

Following this growth, the Ministry of Labor issued new opinions on SRI at the end of 2015. US Secretary of Labor Thomas Perez outlined in his announcement that DOL will not object to these investments as long as these investments meet the same fiduciary standards as any other types of securities offered in the qualified plan. DOL acknowledged its 2008 opinion “Excessive Discouragement” plan sponsors to include SRI products in their plans.

A survey conducted by Calvert Investments in 2015 also showed that the vast majority of retirement plan participants today want to include socially responsible alternatives in their retirement plans. The survey covered 1,200 plan participants and 300 eligible non-participants, 87% of whom were interested in investment products that meet their personal values, and more than 80% said that if they had the opportunity, they would invest in this Products. More than half of the respondents also stated that if the plan includes SRI products, they will be more likely to participate in an employer-sponsored plan.

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These figures illustrate the rapid growth of the SRI industry and its popularity among retirement plan participants and retail investors. BrightScope’s data shows that even in the most recent 2009, only 9% of surveyed funds discovered SRI products. Part of the reason for this growth may come from millennials, who are more inclined to invest in products that fit their ideas and lifestyles. This generation has shown that it is more global and environmentally conscious than its predecessors, and in recent years, funds focusing on companies with a clean environmental record have seen consumer sentiment rise. According to a study by Asset International, non-profit entities’ plans to provide SRI alternatives are more than twice as likely as their for-profit entities.

SRI track record

Another reason that socially responsible investment has become more popular is that more SRI funds have performed well in recent years. TIAA-CREF Social Choice Stock Retail Fund (TICRX) has averaged a return of 10.48% in the past five years, while Calvert Stock Investment Portfolio A (CSIEX) has grown by an average of 10.28% in the past three years.Other fund families, such as Timothy Group, an investment company that provides funds to invest in companies that embrace Judeo-Christian values, also have funds that have performed well in recent years, such as their Large/Mid Cap Value Fund (TLVAX).

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Bottom line

Socially responsible investment is quickly becoming the mainstream sector of the financial market. Those eligible plan sponsors who avoid offering SRI products in their plans are best to reconsider, as the asset base of these funds has grown exponentially in recent years. There are now enough different types of SRIs to create a complete SRI portfolio for customers who want to absolutely avoid providing financial support for certain types of companies. But customers need to do enough homework to ensure that the SRI they buy has screening criteria that exactly matches their values, so they cannot inadvertently hold shares in a company that engages in activities they disapproval.


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