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