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October 10, 2003
Socially Responsible Investment Through 401k Plans Comes of Age
    by William Baue

Since the late 1990s, there has been a boom in socially responsible investment through 401k retirement plans.

Retirement accounts offered through employers, or 401k accounts, are a major investment avenue for neophyte and seasoned investors alike. Having a 401k account allows a person to divert some of his or her pre-tax earnings into investments and avoid taxation until the money is accessed after retirement. Company 401k plan administrators are increasingly offering socially responsible investment (SRI) options to their employees. Many investors are thus getting their first exposure to SRI through their 401k accounts.

The Calvert Group has been making its products available to 401k plans since 1982. Many plan administrators did not bite, however; as of 1996, Calvert was available on only one of the largest 401 k platforms in the country.

Then in May 1998, Calvert requested an opinion from the Department of Labor (DOL) regarding the appropriateness of SRI under Employee Retirement Income Security Act (ERISA) rules. The DOL responded with an opinion that SRI funds are an acceptable choice for fiduciaries of such plans.

"Since then, we have seen a great amount of demand for socially screened funds in retirement plans," said Elizabeth Laurienzo, Calvert's director of corporate communications.

Although Calvert does not disclose the amount or percentage of its assets that are invested through 401k plans, it does disclose that its funds are now offered through nine of the ten largest retirement platforms in the country, ranked by assets. These include Fidelity, MetLife, Merrill Lynch, and Vanguard.

As with Calvert, Domini Social Investments has been offering its products to 401k plans practically since its inception. However, Domini does disclose its assets under management in 401k plans: approximately $600 million, or about 40 percent of its overall $1.5 billion in assets.

Domini serves between 400 and 600 clients, including for-profit clients such as Ford (ticker: F) and government clients such as New York City, Washington State's King County (home of Seattle), and the State of California, as well as nonprofit clients. In addition to fulfilling worker demand for socially responsible options, employers benefit in other ways from offering SRI funds in their 401k plans.

"On the nonprofit side, their missions are often the same ones we're trying to support," said Kyle Johnson, Domini's director of institutional sales. "On the for-profit side, putting an SRI fund like ours on the menu is a very painless way for corporations to demonstrate that they value good corporate citizenship."

Some question whether mutual funds firms' 401k contracts may compromise their ability to be objective in selecting companies for investment. This potential for conflict of interest is even more pronounced for SRI firms, which not only assess companies' financial performance and corporate governance, but also screen their environmental and social performance.

Domini and Calvert vigilantly guard against such conflicts of interest by separating institutional sales from research.

"In essence, there is a Chinese wall between those two functions," Ms. Laurienzo told "Our screening process is not influenced by anything outside of the methodology."

Domini separates the two functions physically: KLD Research & Analytics performs its research. Furthermore, KLD screens out Ford, primarily due to climate change issues, a fact that does not prevent Ford from maintaining its inclusion of the Domini Social Equity Fund (DSEFX) in its 401k plan.

Soon after Ford added the Domini Social Equity Fund to its list of some 60 investment options in late 2000, it also added the Citizens Global Equity Fund (WAGEX) to its menu.

"Often, 401k plans only offer one or two SRI choices--it's as if many of the plan's sponsors look at SRI as an asset class unto itself instead of a style that pervades all of the asset classes," Mr. Johnson told "In that situation, what's great about Domini is that it's a core equity holding--it's a large-cap blend equity index fund, which gives you returns very similar to the S&P 500 over its history, so you know that, from an asset-allocation strategy, this is a bread-and-butter fund."

Domini's current expense ratio is 92 basis points, though it plans to introduce a new product soon that will lower the expense ratio to 66 basis points for plans that do not require Domini to pay record-keeping fees to the record-keeper.

For its part, Calvert waives the sales charge on 401k platforms.

"What distinguishes Calvert among the other SRI providers is that we offer a core line-up of funds that will certainly meet any mandate of a 401k plan provider," said Ms. Laurienzo. "We offer large-cap, mid-cap, and small-cap funds, as well as an international fund, among many others."


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