Investors are throwing more money into funds with a social mission, but do these funds belong in your retirement account?
Emboldened by a surge in assets among so-called socially responsible mutual funds and pensions _ now about $12 trillion _ advocates for these investments say, emphatically yes.
"There's a growing awareness that ESG" _ investment screens for environmental, social and corporate governance-friendliness _ "doesn't hurt performance and actually may help" companies' long-term returns, said Meg Voorhes, research director for US SIF, The Forum for Sustainable and Responsible Investment, citing industry data showing several examples of financial outperformance among companies with high ESG ratings.
These funds are still typically more expensive than plain vanilla index funds or ETFs, though fees have come down. And they have a long way to go to penetrate the workplace 401(k) plan market, though the tide could be turning.
Robo adviser Betterment for Business began offering socially screened funds in its workplace savings plans a couple of years ago, and Pentegra, a White Plains, N.Y., provider of retirement plans to companies, said in March it will offer recordkeeping and fiduciary services for ESG-based 401(k) plans with two other partners.
Retirement savers can certainly find plenty of socially conscious funds in their IRAs and taxable accounts, or through their 401(k) plans' brokerage windows if they have them.
"Clients are definitely asking about them, and performance has gotten better," said Steve Lear, founder of Affiance Financial, an investment firm in Saint Louis Park, Minn.
His firm offers clients a wide array of socially conscious mutual funds through a diversified discount brokerage, but he's not convinced they are the best way for savers to inject a sense of purpose into their financial lives.
"Personally, I like clean, simple and cheap portfolios," he said. Instead, he urges clients to support important causes through philanthropy.
"Is that an advisor's role? I believe it is. Who is supposed to have that conversation if I don't?" he said. Not discussing charity with clients robs them of knowledge about tax strategies associated with charitable giving, not to mention the softer discussion of purpose and legacy in the retirement years, he said.
"I had a physician client with no kids who saved $15,000 a year for several years into a donor-advised fund, plus more when she was getting ready to retire," he said. The fund eventually reached well into six figures. "A development officer asked her if she wanted to establish a scholarship fund and you should have seen her face later as she talked about what she was able to do for that school."
Investment giant and benefits record keeper Fidelity, meanwhile, recently launched a workplace charitable giving program for its corporate clients that will allow workers to make donations to any charity through their benefits department. The donations will then automatically be submitted for eligible matching funds from the employer, saving donors that step, said Tom Ryan, a leader in Fidelity's emerging businesses area. Officials are betting the streamlined process will boost overall giving.
Waters Corp., a Milford, Mass.-based maker of scientific analytical tools, has signed onto the program because of its ease of use for employees, said Mark McAuliffe, director of global philanthropy. The matching program will help set the company apart when recruiting workers, he said.
Another way to put your money where your heart is: estate planning.
Designate a charity to receive a portion of your funds after your death, or write a legacy letter to your heirs reaffirming family values and favorite causes and suggest they donate a portion of their inheritance.
Of course, there's no need to pick just one of these options.
"When investing or thinking about the future or leaving money for the next generation, you're thinking 10, 20 maybe 30 years into the future. It's natural to think, What kind of world will this be by then? Am I investing in things that support my vision for my family's future?" said Voorhes. "If you support philanthropy, keep doing that, but it shouldn't be an excuse for not pursuing sustainable investing. There's no reason you have to choose."
