Pension plan sponsors and their advisors are starting to take more notice of the socially responsible investment movement.

Many sponsors and investment professionals wonder why any investor would risk reducing returns by mixing social issues with their portfolios.

It is widely accepted by the skeptics that socially conscious investors would be better off putting their money to work in the best possible investments, then using the profits to support their favorite social causes.

It was also accepted for many years that the world was flat.

Today, there is a strong movement toward the SRI world, and the growth rate for professionally managed SRI investment funds has been running at almost twice the growth rate for traditional funds, according to the Social Investment Forum, Washington.

Many large, participant-managed defined contribution retirement plans have already added one or more SRI fund choices.

Ford Motor Company, Dearborn, Mich., and General Motors Corp., Detroit, are just two of the many companies that offer SRI fund choices in their 401(k) plans.

Growth in the use of SRI funds in defined contribution plans might be even greater if not for the many investment professionals who are still na?ve about socially responsible investing.

I was one of the naysayers myself until I ventured out in search of answers to my own questions about SRI.

Here are the responses I found to some of what I believe to be common fallacies.

Investors will get lower returns if they integrate their values or their faith with their investment portfolios.

This argument is probably one of the most pervasive fallacies of all. The research has provided a surprising conclusionaccording to recent Financial Analyst Journal and Morningstar.com articles, investors do not have to give up return when they invest according to their values or their faith.

My clients are not asking for SRI.

This is the most common objection I hear when I ask investment professionals whether they have considered recommending SRI to their clients. When I ask mutual fund companies whether they have considered offering advisors SRI fund choices, they say advisors are not indicating any interest in SRI.

But the largest U.S. money managers have noticed SRI. The Vanguard Group, Valley Forge, Pa., and TIAA/CREF, New York, both introduced mutual funds for SRI investors during the first half of 2000. At least a dozen new religious investment vehicles were launched between December 2000 and June of this year, compared with only five launches during the previous six-month period.

SRI complicates an already complicated investment process.

To avoid another element of the investment process because it creates more work for the advisor is an unfortunate excuse.

As professionals, we have an obligation to become and remain educated regarding all elements of investment management that can help our clients meet their objectives. We shouldnt be blind to the fact that many investors want to see their money do good for society as well as provide for their lifetime financial needs.

The Social Investment Forum reported that one out of every eight dollars under professional investment management is involved in SRI.

Imagine what this number would be if more investment advisors became more educated about SRI!

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 jeffp@carlislesri.com.


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.


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