The Socially Responsible 401(k):
Making your Employee Benefits Plan Match
Your Company Values
By Rob Thomas
Organic ingredients. Check!
Sustainable packaging. Check!
Carbon offset certificate purchased when booking trade show travel. Check!
Organic coffee in the staff kitchen. Check!
401(k) retirement program with lots of socially responsible options. What?
Each day, members of the organic community work hard to ensure the integrity of their organic products. At home, they stock their larders with organic food (often grown in their own backyard gardens) or go to organic farmers’ markets on the weekend. Many use low-VOC paint and drive a hybrid car, when not biking or taking the train to work.
But all too often, when it comes to retirement programs, organic companies either don’t offer a 401(k), or the plan’s assets are invested in funds that include, and thus financially support, companies that operate contrary to the values and principles of the organic community. The company plan may offer one or two “socially responsibly invested” (SRI) funds, but employees wishing to spread their retirement investments over several funds are often left to invest in funds that include companies they do not support philosophically.
Why should you care? 401(k) retirement plans are not at the top of every leader’s priorities. But they should be. Numerous studies show that along with competitive base pay and medical insurance, retirement plans are one of the key benefits most important to attract and keep quality employees.
According to About.com’s human resources expert Susan Heathfield, employees should be encouraged to save for retirement as, “each of us will need between 60 percent and 80 percent of our final annual working income every year we’re retired. Since Social Security typically provides only 40 percent of the average retiree’s income, many of us will need to rely on our own savings and investments,” including 401(k) plans which grow tax-free until we retire.
When it comes to employees in the organic sector, many employees care passionately about a variety of social and environmental factors. So passionately, they have dedicated their lives to creating or working at companies that grow or manufacture products with the least environmental footprint.
However, according to a 2002 Calvert/ Harris Interactive survey, less than one-third (32 percent) of employees had access to “screened” socially responsible funds as part of their retirement plans. This is despite the fact that as much as 68 percent of employees surveyed wished to invest their 401(k) dollars in funds that match their principles.
Understanding Socially Responsible Funds
Today, mutual fund companies are incorporating both positive and negative “screens,” combining rigorous financial analysis with environmental, social and governance (ESG) criteria. “Positive” means the companies in the fund may support alternative energy, or have a strong record on human rights and labor issues, among others, while “negative” screens may exclude companies involved with alcohol, cigarettes, guns, or nuclear power as well as those with egregious human or labor rights or environmental problems.
Screened funds are turning out to be some of the best funds. For example, the Pax World Balanced Fund was honored by MutualsAdvisor.com as one of their “Top Ten Mutual Funds for 2008.” Similarly, the Winslow Green Growth Fund was ranked by Lipper, an independent monitor of fund performance, as the number one small cap growth mutual fund for the three-year period ending July 31, 2007.
And no wonder. The screening process Winslow Management Company undertakes is one of the reasons their returns have been so high over the years.
According to the company, the environmental and governance profiles of each company in which they invest are reviewed in tandem with research of the company’s financials. They begin with all publicly available information on a company, including information reported to governmental agencies such as the Environmental Protection Agency and Securities and Exchange Commission. They also use third party research providers such as KLD Research & Analytics, Inc. and Institutional Shareholder Services. Next, they consider a company’s industry to determine what environmental or governance challenges are facing that industry. Senior management of a company are interviewed to judge their understanding of these types of issues.
Findings are compiled into research reports for portfolio managers to use in the final decision-making process. Winslow states that they have expanded their research to review a company’s corporate governance profile, because they recognize the influence that governance practices can have on company performance.
The Socially Responsible Investment Industry Is Growing, But What About Retirement Options?
With investors’ increasing interest in putting their money where their morals are, new screened mutual funds are being announced about as frequently as weeds sprouting in a spring field. One estimate says that over the last two years, an average of one new socially responsible fund is launched every two weeks.
According to a March 2008 report released by the Social Investment Forum (SIF), the national membership association for the social investment industry—SRI assets increased more than 18 percent to $2.71 trillion from 2005 to 2007, while the broader universe of professionally managed assets grew less than 3 percent. As a result, about 11 percent of assets under professional management in the U.S. are now involved in SRI.
Indeed, roughly 11 percent of assets under professional management in the U.S.—or nearly one of every nine dollars—are now involved in SRI. When it comes to mutual funds, there are 173 funds available in 358 different share classes, notes the report.
According to SIF, the increase in SRI investments was spurred by such factors as rising institutional investor interest, growing demand for renewable energy alternatives, concerns about the Sudan humanitarian crisis and the emergence of new products.
However, while the figures showing skyrocketing growth in SRI mutual funds for general investing are impressive, few of such funds have been incorporated into retirement plans, thus limiting the potential political power of the $2.5 trillion that more than 50 million people have invested in retirement funds. Even the most progressive companies usually only offer one or two SRI options in their retirement plans, leaving the remaining funds focused on conventional options.
Given that screened funds are in most asset classes, it has become easy to create a well-balanced retirement portfolio. And, like with conventional funds, if invested properly they can provide hearty returns. Indeed, over the past 17 years, since the inception of the Domini 400 Social Index on May 1, 1990, its annualized returns of 11.01 percent have beaten the S&P 500’s annualized returns of 10.57 percent (as of April 30, 2008.)
“Social investments need to be vetted just as any other portfolio choice,” notes Ian McLeod, investment advisor representative with The Social Equity Group in Berkeley, CA. “But investors can find competitive returns by fully incorporating their values into their retirement plans.” McLeod has set up several accounts for clients such as Presidio World College and Other Avenues Food Cooperative (both in San Francisco, CA), who wanted to offer their staff socially responsible retirement benefits.
Cliff Feigenbaum, managing editor of the Green Money Journal, notes that if your company is trying to invest retirement dollars in funds offering a range of organic companies, it’s not yet all that easy. He said that most organic companies are still too small to be included in such funds, with the exception of companies such as Dean Foods, Gaiam, Green Mountain Coffee Roasters, Organic To Go Food Corp., The Hain Celestial Group, United Natural Foods, Inc. (UNFI) and Whole Foods Market.
Until more organic companies are included in SRI funds, Feigenbaum suggests investors support companies that are active in areas close to the organic world’s heart, such as renewable energy, and use their consumer dollars as an investment.
SRI Retirement Plans: The Next Big Trend in Employee Benefits
If you increase the number of SRI options on your 401(k) benefits plate, your employees will likely appreciate it. In a 2006 Calvert/Yankelovich survey, 68 percent of retirement investors said they would invest in a socially responsible fund if it were made available to them.
Your company won’t be alone, either. Forty-one percent of companies surveyed in a June 2007 report for the Social Investment Forum said they would be providing SRI funds in their retirement plans in the next three years.
According to Paul Hilton of Calvert, “SRI options are available in one of five retirement plans now and will be available in three of five plans in three years. It’s a matter of simple supply and demand. Corporations are responding to the increasing desire of Americans to invest with their values.”
So when your organic company is looking to provide a key benefit that will attract and retain good employees —a 401(k) retirement plan—be sure it reflects their passions and matches your mission statement.
Rob Thomas is the president of Social(k)(www.socialk.com), the most diverse socially responsible retirement investment platform in the U.S. created to offer socially conscious investors the same breadth and depth of investment options available in conventional retirement programs.
The platform offers more than 150 screened socially responsible funds and more than 2000 conventional funds to choose from. More than 360 financial advisors nationwide have registered with Social(k). You can reach Rob at firstname.lastname@example.org.