Socially responsible funds can give your 401(k) a conscience

It might not happen today or tomorrow, but soon you may get the chance to invest in a socially responsible investment in your 401(k) plan.

That’s because the Labor Department this fall issued guidance easing the fiduciary burden for selecting these funds for 401(k)s, according to a Plansponsor article by Fred Reish, a partner at Drinker Biddle & Reath.

At the moment, most 401(k)s don’t offer socially responsible investment (SRI) funds — those that apply environmental, social and governance (ESG) factors to management — as an option. Offering such funds had been problematic, according to Reish. Investment committee members w could easily get sued by plan participants if the SRI didn’t perform as expected. And, there’s never really been enormous demand for SRI funds from 401(k) participants.

But all that may change now. One, Millennials, who are now starting to save for retirement, might be more interested than Boomers and Gen X in SRIs. And two, SRIs may be consistent with the culture of a socially conscious or environmentally sensitive company, according to Reish.

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So how might you evaluate whether to invest in an SRI fund in your 401(k), and how might you decide if it's a good investment? Here’s what experts had to say.

• Is it really an SRI fund? Your first order of business: Determine whether the SRI fund is really an SRI fund. Unfortunately, that’s not easy. “Basically, there is no ‘SRI flag’ that funds have to fly to indicate whether they are SRI or not,” says Brooks Herman, head of research for BrightScope in San Diego. “So there are a lot of personal judgment calls and digging through fund prospectuses when looking at the list.”

Others agree. “There is a lot of greenwashing going on out there with all kinds of asset managers claiming to offer ‘green funds’ when they really aren’t,” says Robert Eccles, chairman of Arabesque Asset Management in London.

Ask your employee benefits department for the criteria used to select the SRI. “The company will have done some basic due diligence,” says Christine Russell, a consultant with Christine Russell Retirement Consulting in Philadelphia.

Note, too, that methodologies for determining whether a fund qualifies as “sustainable investing” are still being developed, says Eccles. He recommends using Morningstar for research.

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Also, ask yourself if the fund fits your definition of an SRI. What is the investment avoiding (tobacco stocks, for example) and/or what is it supporting (solar energy stocks)? “Then participants decide whether this philosophy matches up with their own,” Russell says.

Eccles also recommends the following due diligence:

First, determine how transparent the fund's methodology is. “While no one is going to give away the ‘secret sauce’ in their investment strategy, one should be skeptical about descriptions that are largely qualitative with a lot of flowery language around sustainability,” he says. “Look for some numbers and phrases such as ‘material ESG factors,’ which show there is some degree of rigor.”

And two, look at the composition of the investment committee and the fund’s trustees. “Is there anybody who has ‘sustainability credentials,' or are they all traditional financial, accounting and legal types?”

• Evaluate same as any other investment option. How do you go about selecting the investments for your 401(k) plan today? Use the same approach with SRIs.  Examine the long-term performance, manager tenure, fees and expenses, investment objective and philosophy and how it fits in with your other investments, says Russell. Does it, for instance, help you further diversify your portfolio, or does it duplicate the objectives of other funds?

• Consider it a satellite fund. As a rule, you shouldn’t invest more than 5% of your 401(k) in a specialty fund, including an SRI. “The typical investor should invest a modest percentage of his or her assets here,,” says Eccles. In general, you might invest the bulk of your assets in a core fund, such as a target-date or target-risk fund, and then a smaller amount in satellite funds.

• The option might already be available. Surprise! You might already be able to invest in SRI funds if you have a brokerage account option as part of your 401(k). That’s because the brokerage account gives you access to all sorts of investments, including SRI funds.

• A dose of reality. Now truth be told, it might take awhile before plan sponsors include SRI funds as a 401(k) investment option, according to Jerry Bramlett, a defined contribution consultant in Austin.

“Having implemented hundreds of 401(k) plans over three decades," he says, "I cannot remember once being asked for a socially responsible fund.”

Robert Powell is editor of Retirement Weekly, contributes regularly to USA TODAY, The Wall Street Journal and MarketWatch. Got questions about money? Email Bob at rpowell@allthingsretirement.com.