Social Investing Can Fit In Pension Plans

Investors involved in SRI are extremists.

Socially responsible investors and professionals look at the triple bottom line when evaluating company performance. In addition to financial performance, they consider the effects of the company on the environment and society. Therefore, it could be said that SRI investors truly look at the “big picture.”

Of course, adding SRI funds to a 401(k) plan brings in other considerations.

One concern is the possibility that considering social goals may somehow conflict with the plan sponsors responsibility to put the interests of the plan members above all other interests.

But the U.S. Department of Labors Office of Regulations and Interpretations issued a May 1998 letter stating that investments incorporating characteristics of socially screened mutual funds could be included in retirement plans that are intended to qualify for tax breaks under section 404(c) of the Employee Retirement Income Security Act.

The fiduciary must still determine whether the mutual fund is expected to provide an investment return similar to that of alternative investments having similar risk characteristics.

Because plan fiduciaries must put plan members first, fund costs are another concern.

Trustees should evaluate SRI funds in the same way they evaluate non-SRI funds, by comparing fund performance against an appropriate benchmark. Particular attention should be paid to expense ratios since SRI funds tend to have higher expense ratios. The primary reasons for the higher costs include the cost of actively screening for fit with social goals; advocacy efforts, including sponsoring and co-sponsoring corporate resolutions and dialogue with companies to effect change in behavior; the predominance of active stock selection by fund managers; and the immaturity of the market.

Plan trustees may wish to consider “passively managed funds” that are linked to the performance of well-known stock or bond indexes, rather than actively managed funds, due to the index funds more favorable historical returns and lower expense ratios.

Although an SRI index fund may be ideal for a 401(k) plan, managing an SRI index fund poses extra challenges for the index fund managers.

SRI index funds normally have an actively managed social screening process and a passively managed financial screening process.

Index fund managers normally hold significantly more securities than managers of actively managed funds, and they are not accustomed to performing fundamental analysis on securitieseven though the analysis is social fundamental analysis.

Still another concern is coming up with an appropriate set of social goals.

Plan sponsors and their advisors should be careful to consider the ???????diverse demographics of plan participants before selecting SRI fund options, because SRI has different meanings to different investors.

For example, while one participant may oppose investing in the military, another participant whose relative serves in the military may have a more favorable opinion about military-related investments.

Sponsors and advisors should consider educating plan participants about SRI, then follow up with questionnaires to determine their interest in the SRI concept and particular social goals.

In some cases, a customized SRI separate account might be a better fit than an SRI mutual fund.

Jeffrey C. Petersen is president at Carlisle Social Investments L.L.C., Kennewick, Wash., a company that specializes in indexed investment programs for Catholic institutional and individual investors. Carlisle also manages the Carlisle Catholic Indexes. He can be reached at [email protected].

Reproduced from National Underwriter Life & Health/Financial Services Edition, October 8, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

Copyright 2001 by The National Underwriter Company. All rights reserved. Contact Webmaster