By SARAH MORGAN
Retirement savers searching for ways to match their investments with their morals may soon have new options.
A growing number of 401(k) plans are adding to their investment menus so-called socially responsible funds -- mutual funds that invest in or avoid certain companies, based on pre-stated ethical guidelines. A recent survey by human resources consulting group Mercer found that 14% of 401(k) plans now offer a socially responsible option; the number is expected to double within the next three years. This is the first year of the Mercer survey, but if the numbers prove correct, that would be substantial growth: Only 9% of plans offered such an option in 2009, according to the most recent data available from Brightscope, an independent rater of 401(k) plans.
Plan providers say they're adding the funds in response to rising demand from participants. Some of these investors simply have strong values they want to align with their 401(k) funds, says Craig Metrick, a Mercer researcher who worked on the survey. Other investors, he says, may view socially responsible funds as safe havens from future market meltdowns; after all, one could argue that some of the stocks hit hardest during the 2008 crash, including financials, weren't the best corporate citizens, says Metrick.
But critics counter that these funds' many restrictions may put them at a disadvantage to other funds without such limitations. Some research has found that the best-performing stocks over long periods are in the "sinful" categories like tobacco, says Marcin Kacperczyk, an assistant professor of finance at New York University's Stern School of Business. Indeed, after hundred of studies on socially responsible investing, the only conclusion is that these do-gooder funds won't necessarily underperform their peers because of their investing guidelines, says Lloyd Kurtz, a lecturer at the University of California, Berkeley's Haas School of Business and the chief investment officer at Nelson Capital.
Another drawback for investors with strong convictions, say investing pros: Some socially responsible funds include stocks that may not fit their idea of what's socially responsible. While some funds screen out certain industries -- most commonly tobacco, alcohol, and weapons -- others simply pick the best companies in any industry, say analysts. For example, the SRI fund most commonly found in retirement plans, the $960.5 million TIAA-CREF Social Choice Equity fund (TICRX) doesn't rule out any industries, although the firm says most tobacco, alcohol and weapons stocks don't meet its minimum "responsibility" criteria.
For the socially minded investors, there's also the problem of diversification, Kurtz says: While there are dozens of socially responsible domestic stock funds, there aren't as many choices in other categories, making it difficult for investors to build a diversified all-socially responsible portfolio, he says.
The good news for savers looking to add a socially responsible fund to their 401(k)s: Some of the most popular ones used in retirement plans have matched or slightly outperformed the market over the past several years. The TIAA-CREF fund gained 3.48% annualized over the past decade, about even with the Standard & Poor's 500-stock index; a spokesman for TIAA-CREF says the fund is designed to match, not outperform, the market. The $1.4 billion Ariel Fund (ARGFX) and the $1.1 billion Ariel Appreciation Fund (CAAPX), which both avoid tobacco and handguns and favor companies with good environmental records, have outperformed the S&P 500 by about two percentage points over the past 10 years.
Another good option, say analysts, is the $2.1 billion Calvert Equity fund (CSIEX), which has bested the S&P 500 and the large-cap growth category by more than one percentage point in the past decade. And the $1.5 billion Neuberger Berman Socially Responsive fund (NBSRX), also found in many retirement plans, has beaten the S&P 500 index and the large-cap growth category by more than two percentage points over the same period, according to Morningstar analysts.
Corrections & Amplifications
An earlier version of this story incorrectly reported the performances of the Ariel fund and the Ariel Appreciation fund.