SRI Funds and Your 401(k): What You Need to Know

Socially responsible investing has been around for decades, but it has been slow to penetrate the employer-sponsored retirement plan market. This has partially been a result of a Department of Labor opinion released in 2008 that indicated that participant investment in the socially responsible sector should be “rare.” This opinion discouraged many plan providers from including these options for their participants. Since then, most SRI investing has been limited to retail accounts and IRAs.

But times are changing. The DoL issued new guidance in 2015 that allowed fiduciaries to use ESG considerations as "tiebreakers" when comparing otherwise equal investments. And more recently, the DoL updated its guidance to acknowledge that fiduciaries can proactively apply environmental, societal and governance (ESG) factors when making investment decisions, provided they focus on economic merit.

As retail investors and retirement plan participants have grown more knowledgeable and sophisticated in recent years, the demand for investment options that reflect their values has also grown. A survey conducted by LGT, a banking and asset management group run by the royal family of Liechtenstein in 2017 showed that 55% of its plan respondents offered socially responsible investment alternatives, and the Forum for Sustainable and Responsible Investment showed that the asset base in this sector has mushroomed in recent years: $639 billion in 1995; $2.7 trillion in 2007; $6.5 trillion in 2014, and $8.72 trillion in 2016 (these numbers include balances held in qualified plans but did not break them out separately). Such funds can screen companies for a variety of criteria, such as empowering women, ethics/sin, the environment, religious concerns and more.

The Department of Labor issued a new opinion on SRI in late 2015, in the wake of this growth. In its release, U.S. Secretary of Labor Thomas Perez outlined that the Department has nothing against these investments as long as they meet the same fiduciary criteria as any other type of security that is offered in qualified plans. The Department admitted that its 2008 opinion had “unduly discouraged” plan sponsors from including SRI offerings in their plans.

A 2015 survey conducted by Calvert investments also reveals that the vast majority of retirement plan participants today want socially responsible alternatives inside their retirement plans. The survey covered 1,200 plan participants and 300 eligible non-participants, and 87% of them were interested in investment offerings that matched their personal values and over 80% said that they would invest in such offerings if they were available. Over half of them also said that they would be more likely to participate in an employer-sponsored plan if it carried SRI offerings.

These numbers speak to the rapid growth of the SRI industry and its popularity among both retirement plan participants and retail investors. Data from Brightscope showed that even as recently as 2009, SRI offerings were found in a mere 9% of funds that were polled. Part of the reason for this growth may be coming from the millennial generation, which has shown a much greater predisposition to invest in offerings that match their philosophies and lifestyles. This generation has shown itself to be much more globally and environmentally minded than its predecessors, and funds that concentrate on companies that have clean environmental track records have seen a rise in consumer sentiment in recent years. Plans at nonprofit entities are also more than twice as likely to offer SRI alternatives as their for-profit counterparts, according to a study done by Asset International.

Another reason that socially responsible investing has become more popular is because there are now a greater number of SRI funds that have performed well in recent years. The TIAA-CREF Social Choice Equity Retail Fund (TICRX) has posted an 11.74 percent average return over the past five years, and the Calvert Equity Portfolio A (CSIEX) has grown by an average of 10.28 percent over the past three years. Other fund families such as the Timothy Group, an investment firm that offers funds that invest in companies that embrace Judeo-Christian values, also has funds that have done well in recent years, such as their Large/Mid Cap Value fund (TLVAX) that has posted a five-year return of 10.45 percent. 

Socially responsible investing is rapidly becoming a mainstream sector in the financial marketplace. Qualified plan sponsors that have heretofore avoided SRI offerings in their plans would be wise to think again, as the asset base of these funds has grown exponentially in recent years. There are now enough different types of SRIs to facilitate creating entire portfolios of them for clients who wish to absolutely refrain from financially supporting certain types of companies. But clients need to do their homework to make sure that the SRIs they purchase have screening criteria that match their values exactly, so that there is no chance that they will inadvertently hold shares of a company that deals in activities of which they disapprove.