Although assets in socially-responsible funds have grown from $1.185 trillion in 1997 to $2.16 trillion in 1999, socially-screened funds are under-represented in 401(k) plans, said mutual fund industry executives.
Only large corporations offer socially-responsible funds in their 401(k) plans and they usually offer only one such fund in those plans, said George Gay, CEO of First Affirmative Financial Network, a registered investment advisor in Colorado Springs, Colo. which specializes in socially-responsible funds. Smaller companies with 100 employees or less are not offering them at all, Gay said.
"The availability in smaller choice plans is abysmal," said Gay. "We've worked and worked and worked to provide a social option in small plans and it just has not happened . . . you just don't see it, I know that the reps are totally frustrated."
The problem lies in the administrative costs associated with adding funds to a 401(k) plan, he said. Most plan sponsors offer participants plans from a single family of funds or a group life insurance plan. Very few 401(k) plan providers offer socially-responsible funds and the administrative costs of adding a fund from an outside family or plan is too costly for most businesses to justify, Gay said.
Plan trustees, who would rather avoid the complications of adding a fund to their plans, often see adding a socially-responsible fund as a hassle.
"To be a 401(k) trustee is complicated and they get advice from attorneys saying (they) have to limit (their) liability . . . or worse, they are getting no advice at all and they don't know what they are doing," said Gay.
Plan participants must also be informed of their options and many trustees do not want to offer a wide variety of funds, said Tricia Brambley, president of Resources for Retirement Plans of Newtown, Pa.
"Most plan sponsors want to offer the major asset classes across a risk-return continuum and if you have eight or ten, you've covered most of the classes," she said. "The drawback (to adding sub-accounts) is that you can get to the point where you overload the participants and they don't know what to choose."
For those reasons, socially-screened funds are a rare option in most plans, she said.
"I've been asked about it, but no one offers them," she said.
But according to a report issued last November by the Social Investment Forum, more employers are offering socially-screened funds as part of their retirement plans than ever before. The report cites a study by the Calvert Group of Bethesda, Md. that found that 35 percent of mutual fund investors with defined contribution retirement plans at work said their employer offers a socially-screened fund.
Plan participants' requests for the funds are also on the rise because of increased media attention on issues like the environment and unfair labor practices, said Craig Cloyed, a senior vice president and the national sales manager for Calvert.
"I think more people are cognizant of (social issues) and I think plan sponsors are reacting to this," he said. "And performance of social funds has been really good in recent years. As more sponsors see the performance (of social funds) they will be more inclined to include them in their plans." Several of Calvert's funds have routinely outperformed the S&P 500, he said.
One of the major stumbling blocks for socially-responsible funds being offered in defined contribution plans is a lack of plan providers that carry them, said Gay. Because most major fund groups do not offer a socially-responsible fund, plan providers usually do not have them, he said.
There are signs, however, that some of the large fund companies are taking notice of socially-responsible funds. Vanguard is expected to launch its first social index fund in the next few weeks. The new fund will use an index developed by Calvert.
The Internet is streamlining some of the administrative duties currently handled by plan trustees so that the costs of including socially-responsible funds is diminishing, said Cloyed. Also, since plan participants are increasingly obtaining investment information from the Internet, plans are being relieved of the educational burdens of offering a wide variety of funds, he said.
But a major issue plan sponsors have with socially-screened funds is that they take a moral stand on issues that could alienate or offend some of their employees, said Steve Dillenburg, a portfolio manager for Summit Funds of Cincinnati, Ohio.
"Frankly, the companies that are asked to (include a socially-responsible fund) are forced to subscribe to some manager's vision of what is socially responsible and what isn't," he said.
Heavily-screened companies in the tobacco, alcohol and defense contracting industries are reluctant to offer socially-responsible funds in their defined contribution plans because those funds most likely exclude their companies from their portfolio, Dillenburg said. While it would be easy for companies like Anheuser Busch, Phillip Morris, Honeywell and 3M to do so, they probably will not add a fund that takes a moral stand against them, he said.
"It's a real dilemma for them," he said. "If you aren't going to be part of that investment, it poses a problem."
Dillenburg's firm has filed with the SEC to introduce the first socially-responsible S&P index fund that will avoid moral judgements, he said. Rather than exclude companies because of what they do, Summit's Total Social Impact Fund will invest in all 500 companies listed on the S&P. However, it will invest a greater percentage of its assets than the S&P 500 Index does, in companies that adhere to ethical business principles outlined in The Caux Principles for Business, a standard developed by global business leaders in 1994.
The fund will weight companies for fair advertising practices, quality of their products, employee relations, workplace safety, operations transparency, community and investor relations, environmental practices and supplier and vendor relations.
Dillenburg plans to sell the fund to companies that might otherwise be screened out by traditional socially-responsible funds and companies that do not want to alienate employees by offering funds that take a moral stand on certain issues, he said.
But anyone who historically has invested in a socially-screened fund has done so because he wants to take a moral stand, said Gay of First Affirmative Network. That is the whole point of a socially-responsible fund and Summit will have a difficult time selling the fund, he said.
Summit could also find itself in trouble with the SEC if it is not careful how it represents the fund because most investors assume a socially-responsible fund screens out certain companies, he said.
Cloyed of Calvert said he does not consider The Total Social Impact Fund to be a socially-responsible fund at all.
"It's like the difference between a regular beer and a light beer," he said. "We are offering regular beer and they are offering a light beer."
