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When your company retirement plan doesn't include socially responsible funds

June 5, 2006



Has this happened to you? You want to invest responsibly, but your employer's retirement plan only offers funds that don't screen out objectionable companies. Is there a solution? Rob Thomas, founder of Social(k) in Springfield, Mass., has one. Here are edited excerpts of his talk with the Monitor's Laurent Belsie:

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Is it common for investors to have no 401(k) money in funds that reflect their values?

Mr. Thomas: Very common. I've been doing retirement plans for about eight years. [Back when I started] different companies that run their business in a sustainable and socially responsible way weren't finding they could take that same philosophy into their retirement plans. The employee would look at the 401(k) kit and say: "I work with you because of what you do and how you do it. And you're asking me to invest in these companies that we are very vocally fighting in the front of our store?"

So even ethical companies had trouble creating an ethical 401(k)?

Thomas: Exactly.

What about big companies? A study last year showed that only 3 percent of S&P 500 companies with retirement plans had a socially responsible investing (SRI) option.

Thomas: It's small, but growing faster than the mainstream mutual funds.

How many clients does Social(k) have?

Thomas: We went live Sept. 1, 2005. The 401(k) business cycle tends to close down by mid-October because a lot of people tend to shoot for Jan. 1 conversion or installation of a new plan. So we missed the 2005 fourth quarter. We have 25 plans with another five that [we are picking up]. Thirty plans doesn't sound like a lot. But for something's that come from nowhere in five months, it's getting a lot of notice in the industry.

Are these small companies or large companies?

Thomas: They're everything. We do start-ups, which a lot of people won't touch because of the economics of the 401(k). We do one-person start-ups, five-person, 10-person. We're also quoting on a 3,200-person start-up and a 1,700-person existing plan, which happens to have $17 million as well.

What does Social(k) offer?

Thomas: There's about 200 [screened] funds out there, whether they're screening for social concerns or Judeo-Christian and faith-based [issues]. We hope to have all of them. Right now, we have about half of those. It's about 60 funds that have social screens and about 40 funds with faith-based funds.

So this runs the gamut from conservative to liberal funds?

Thomas: Exactly. Our job is not to say you should be here or you should be there. Our job is to make sure we have a choice for everybody.

At best, most company retirement plans only offer one or two ethical funds.

Thomas: It doesn't make sense. You may want to have screens of some sort applied to your funds. But having one fund that happens to be a catchall large-cap growth ... just doesn't fit the bill. No investor would argue that one fund does everything well.

Why don't companies offer more choices?

Thomas: The economics of a 401(k) are such that typically [plan providers] have to come up with $180 of revenue per participant. That's the cost of providing a 401(k). They'll do that by having a fair amount of the assets in their own funds.... Even if they have 2,000 or 3,000 funds to choose from, at the end of the day, you might only have six slots available for something other than the home fund family.

How can employees convince their employer to broaden the ethical-investing options?

Thomas: You need to go to your [human-relations] person and say: 'There are opportunities out there to expand.' And if enough of the employees go to the person and say: "We want more than one choice," that person will have an obligation to figure out a way to do it.

Does that pressure work?

Thomas: That's why we came up with this. We were hearing over and over again that there was not enough of a variety of screened funds available. It was that demand of people saying - "We want more than one choice; we want more than one fund family represented" - that gave us the concept.

Once employees get a diversified plan, what do they choose?

Thomas: They don't know what to do. It's the classic example. If you walk in a supermarket and there's three jams, you pick the one you like. When there's 13, you can't make a decision.

So they want the options. But they rarely use them?

Thomas: But that's true of [all] 401(k)s. What they've done is go from three or four non-SRI [funds] to three or four all-SRI [funds].

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