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November 02, 2004
How to Open Your Own Socially Responsible Investment Retirement Portfolio
    by William Baue

In this real-life profile, an SRI-oriented financial planner advises a 34 year-old woman how to transfer her non-SRI retirement account into a portfolio of SRI mutual funds.


When considering retirement, most people prioritize financial security, while many also prioritize the promotion of a socially and environmentally sustainable future in which to retire. With its focus on the long term, both in regards to financial returns and the social and environmental consequences of corporate behavior, socially responsible investing (SRI) can go hand-in-hand with retirement planning. While many retirement plans have been adding SRI options to their menus, there are still many plans with few or no such options.

Such is the case for Amy Rankin, a 34 year-old woman of Durham, North Carolina who wrote SocialFunds.com seeking advice.

"I don't have much to invest--maybe $8,000--which I shifted into a money market retirement account earning one and a half-percent interest out of my 403(b) account through my previous employer, the North Carolina State Employees Credit Union [NCSECU], because Fidelity does not have mutual fund options that meet my standards," Ms. Rankin told SocialFunds.com. "I want to feel good about where I invest it, so I am looking for a socially responsible retirement fund."

SocialFunds.com does not provide financial advice, so we talked with Charles Turner of Littleton, Colorado-based Turner Financial Planning, a fee-only financial planner who works with clients on an hourly, as-needed basis. Mr. Turner, who is also a member of the SRI-oriented First Affirmative Financial Network (FAFN), agreed to develop an SRI retirement portfolio for a SocialFunds.com profile according to Ms. Rankin’s particular situation.

Mr. Turner first asked Ms. Rankin to fill out a risk tolerance questionnaire. On a scale from 1 (not important) to 9 (very important), Ms. Rankin rated capital preservation and inflation protection as very important (8), low volatility and growth as moderately important (7 and 6, respectively), and current cash flow as not important (1). She is willing to take a moderate amount of risk (5) to achieve a higher return.

Next, Mr. Turner addressed social screening factors with Ms. Rankin, who identifies herself as a teacher, volunteer at a food co-op, house owner, and partnered lesbian who is active in church. Ms. Rankin's highest priorities include companies with gay, bisexual, lesbian, and transgender (GBLT) partner benefits, human and worker rights, and environmental responsibility. She also supports broad-based social screening on other issues, such as sustainable development and diversity. As for exclusionary screens, she wishes to avoid animal testing, weapons production, and child labor, and she would specifically prefer to avoid supporting "companies like Clear Channel Communications [ticker: CCU], which dominate media voices."

"I know I want 100 percent socially conscious funds, not just part of my investments," Ms. Rankin added.

Mr. Turner explained that researching individual companies is very expensive and thus the most affordable way for investors with less than $100,000 to access such research is through mutual funds, which spread the research cost across all their investors.

"You should also know that sometimes socially responsible mutual funds hold shares of companies that don't meet their screens so that they can practice shareholder advocacy and try to move that company in the right direction," Mr. Turner told Ms. Rankin. "Also, some mutual funds hold shares in companies that are the least offensive in their industry (oil companies, for example) because it's good to have that asset diversification and it's good to reward companies that are best in their industry."

"So no one mutual fund will have a 'perfect' collection of investments because if you look deep enough into any one company, you are likely to find something of concern," Mr. Turner added.

Before listing his specific recommendations, Mr. Turner addressed some important details, such as contacting her retirement plan provider to ascertain if she will be assessed penalties, fees, or charges of any kind for transferring to another custodian. If so, it is wise to ask for an explanation of when they are reduced and when they disappear completely. Annuities often have sales charges that typically decrease by about one percent per year, so it makes sense to wait until those charges approach zero, according to Mr. Turner.

Assuming no penalty for transferring, Mr. Turner then recommended that Ms. Rankin open a rollover individual retirement account (IRA) at the discount broker of her choice. Transferring funds via a check made out to her would be "unpleasant," so Mr. Turner advised her to ask for a "trustee to trustee" transfer of her retirement funds directly from her former account to her new discount broker account.

With these technicalities out of the way, Mr. Turner made his recommendations, allocating about 75 percent of her portfolio to stocks and 25 percent to bonds as is appropriate for her risk tolerance. He advised her to pursue an asset allocation of 35 percent of her retirement portfolio in large capitalization companies through the Domini Social Equity Fund (DSEFX) and 15 percent in small cap through the Citizens Small Cap Core Growth Fund (CSCSX). He also recommended she allocate 25 percent of her portfolio to global companies through the Portfolio 21 Fund (PORTX). As for bonds, he tapped the Domini Social Bond Fund (DSBFX).

"The screens meet my needs for the most part, though I am somewhat uncomfortable with investing in a few of the larger companies in the mutual funds--Coca-Cola [KO], for example," said Ms. Rankin. "I also just want to know more about each and every company--I could drive myself crazy!--yet I know I have to trust the screening processes."

Mr. Turner reassured Ms. Rankin on the portfolio's match with her risk tolerance.

"This should result in a portfolio that allows you to 'sleep at night'--in other words, it has enough risk to generate returns but not so much risk that you will be uncomfortable when the market temporarily loses value," Mr. Turner told Ms. Rankin.

"Note that these recommendations to do not address the issue of whether or not you have enough money to retire," Mr. Turner added, as Ms. Rankin had not considered how much money she will need to retire and did not provide a desired annual rate of return. "I recommend you consult a financial planner to help you develop a retirement plan."

 

 
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