Socially Responsible Funds Popular in Mission-Driven 401(k)s

Critics cite market underperformance

By Stephen Miller, CEBS Sep 30, 2011
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Update: DOL Liberalizes Rules for Investing Pension Assets in ‘Socially Responsible’ Funds

In October 2015, the Department of Labor (DOL) issued new guidance, IB 2015-1, clarifying when it is acceptable for pension plan fiduciaries to invest plan assets in funds that promote environmental, social and governance goals. See the SHRM Online article DOL Gives an OK to ‘Socially Responsible’ Funds.

The number of 401(k) and other defined contribution retirement plans in the U.S. that offer what are marketed as sustainable and responsible investment (SRI) funds could double in the next two to three years, according to a September 2011 report Opportunities for Sustainable and Responsible Investing in U.S. Defined Contribution Plans by HR consultancy Mercer and the US SIF Foundation (formerly the Social Investment Forum Foundation), a nonprofit membership association for professionals, firms, institutions and organizations engaged in SRI.

In general, SRI funds favor corporate practices that are believed to promote environmental stewardship, consumer protection, human rights, social justice and diversity. Some, but not all, SRI funds avoid businesses involved in alcohol, tobacco, gambling, weapons and the military. SRI funds use various screening and ranking methods to select companies deemed suitable for their portfolios.

The report found that 14 percent of U.S. defined contribution plan sponsors offered one or more SRI fund options as part of their investment menus, while 13 percent were discussing adding an SRI option or intended to do so in the next two to three years.

“Today, more and more Americans rely on defined contribution plans for their retirement, and it is clear that SRI options are going to be a bigger part of that picture," said US SIF CEO Lisa Woll. "However, plan sponsors and participants have had little concrete information about the availability of sustainable and responsible investing options,” she noted.

Mercer Principal and US Head of Responsible Investment Craig Metrick added, “Given the large number of plan sponsor respondents who admit to little or no knowledge of SRI products and indices, education is clearly a critical and a significant opportunity. Thus, better awareness of the variety of SRI funds available and the performance and risk characteristics of those funds could help in expanding the SRI market share in defined contribution plans." In addition, he noted, "ascertaining whether participants are interested in SRI options is also important."

Serving the Mission

Plan sponsors that offer SRI options say the primary reasons for doing so are to align their plans with their organizational missions and to meet employee demand, the survey revealed. Among the findings, SRI fund options are:

  • Most likely to be offered where investment philosophy is aligned with an organization's objectives and culture.
  • More likely to be found in the plans of nonprofit, mission-based or public organizations than in corporations.

Critics Cite Underperformance

However, many investment advisors remain wary of SRI options. For instance a September 2011 report, Concerns about SRI Funds, on the website of Community Ladders, an organization that seeks to help people make better financial decisions, found that:

"While Vanguard’s Total Stock Market Index Fund would have given you a 10-year annualized return of 3.6 percent, you would only have gotten 0.9 percent from its FTSE Social Index Fund. Calvert’s Social Index Fund also underperforms, returning only 0.6 percent to its investors over the same period. Both social index funds also underperform in the one, three, and five year return measurements."

The report concludes, "While we wish it otherwise, existing SRI funds have struggled to keep pace with the wider market. Compared to a low-cost indexing strategy, SRI funds are more expensive, have historically underperformed, and are not well diversified. We support SRI but want our members to be cognizant of the tradeoffs."

A better approach might be to help employees understand the investments of currently available mutual funds in their retirement plans—and the rationale behind broad-based asset-class investing.

As previously reported…

In When Diversity Meets Benefits, SHRM Online reported on employees requesting Islamic investment funds that meet the principles of Sharia, or Islamic religious law; funds intended to represent Catholic values; and funds that promise to invest only in financial products that conform with the Halakhah, the body of Jewish religious law.

Stephen Miller, CEBS, is an online editor/manager for SHRM.

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