For most of us, our savings are in our retirement accounts.
In earlier posts, we’ve been considering options for investments from community-based investment clubs to crowdfunding and investment notes.
Today, I thought we’d look at our retirement plans to take advantage of our pooled financial resources and put them to good work.
- Employer Plans
- Individual Retirement Arrangements (– yep, that’s what IRA stands for!)
Along the way, we’ll touch on the differences between Socially Responsible Investments (SRI), Socially Responsible Impact Investment (SRII) and Environmental, Social, Governance Investment (ESG)
Should We Move Retirement Funds to Ethical Investments?
Back in 2013 when I attended Slow Money events in Southern California, it wasn’t uncommon for the introductory speaker to ask folks how many had investment accounts.
A few raised their hands.
Then, the speaker asked, how many of you have 401(k)s or retirement plans. More hands would shoot up.
The idea: most of us had at least some money in investment accounts of some sort. Most of those investment accounts are in Wall Street investments.
The speaker finally implored the listeners to move some of their money using self-directed IRAs.
He (and it was generally a ‘he’) was referencing the Slow Money Principles:
“There is such a thing as money that is too fast, companies that are too big, finance that is too complex. Therefore, we must slow our money down — not all of it, of course, but enough to matter.”
Which is an excellent place to start.
What Makes It Tough
However, having retirement holdings tied up in things we may not like, doesn’t necessarily make it a likely place for shifting money into ethical investing. Regardless of our moral compass, the set it and forget it most of us do in our retirement savings accounts makes it hard to change.
Mechanics are one thing.
But, even if we choose to brave the process, the next steps around investment choice may mean feeling overwhelmed.
Comfortable First Steps
Ever since listening to those speakers, I appreciate the value in comfortable first steps. Moreover, I’ve tried to suggest simple ways you can make a difference.
As I’ve covered in earlier posts, you shouldn’t be afraid of small dollar amounts.
Small dollar amounts are impactful. They build your experience and create experiential learning and What I Know (WIK) decision making. Your small investments of $25 can result in loans of several thousand while building your ethical investment muscle.
Looking At Retirement Funds for Ethical Investment
If, after all that, you still want to do more there may be answers in your retirement funds.
If, you want to have:
- more options
- or move large amounts towards ethical investing
our retirement savings may be the best place to find savings.
I have a couple of friends who are doing just that.
One is a committed ethical investor moving all his money to impact investment.
The other had most of her wealth in her retirement accounts, and she wanted to move some of her money to impact investing.
There are several ways to move your retirement savings toward your ethical investment themes.
These approaches sit upon a continuum.
Some are easy and some more difficult.
Still, as with many things, there are always tradeoffs.
The hard approach gives you more control.
But here I’ll examine several ideas you can use to get started and develop your ethical investment retirement portfolio.
First Steps: Employer Retirement Plans
A first step is to look to your existing employer retirement plan to see if they offer a type of investment known as known as Socially Responsible Investing (SRI) or Environmental, Sustainable, Governance (ESG) options for investing.
For most of us, this means your 401(k).
(…for teachers and government employees, your 403(b) or 457 Plans work like private sector 401(k)s)
At least a few of these funds are available in most company 401(k) plans. If they’re not, you can ask your HR department to consider including them – realize, by asking, in addition to getting ethical investments available in your portfolio, you’ve also found an excellent opportunity to spread the word around ethical investments!
If you’re looking for opportunities in established 401(k)s, you’ll find your employer plan within this category will likely include Calvert Funds or Pax. Your company probably won’t give you much choice beyond these, but these funds are a good place to start. You may also see Vanguard or Fidelity funds for ethical investments.
Socially Responsible Investment
Early forms of socially responsible investing used filters to pick their investments.
Fund managers use ‘negative’ screens to make sure the companies they invest in are not investing in things like firearms, tobacco or pornography.
SRI is often a satisfying first step, but you may want to go further.
For example, you may find that even with these funds, some fund managers will invest in companies with questionable practices to be activist shareholders.
Overall, socially responsible investments are less concerned about the impact and more interested in doing less harm.
A Case Study
In an example of this at work, I had a client committed to animal rights disturbed over Calvert’s holdings that included beauty companies and animal testing. The client and I worked together in the early 2000s.
As we researched the company, we learned Calvert worked closely with animal rights organizations like PETA to determine their strategy.
Calvert strategists felt they had a more significant impact as activist shareholders than not acting as a result of the negative screens.
My client invested, but she was never happy with their investment process.
Socially Responsible Investments (SRI) funds have been around from the ‘70s.
Environment, Social Governance Investment
Environment, Social, Governance investing, also known as sustainable, responsible, impact investment (SRII) gained traction in 2006 when the United Nations promulgated the Principles for Responsible Investment (PRI).
ESG goes further than negative screens.
Negative screens may exclude investment opportunities that make financial sense while ESG works to synthesize investment performance with responsibility toward the environment, social themes and governance.
ESG analysis works to determine if the three factors materially affect investment performance.
These are the decisions and questions you may face using negative screens and an ESG lens when you work with your current company provider. Using your company held 401(k) is a great idea and a familiar place to start making a difference with your savings. Fund managers vet these companies using traditional metrics in addition to their chosen ethical investment strategy. As a result, they’re likely to perform like conventional Wall Street investments. There will be ups and downs and moves along with the investment indexes like the S&P or the Dow Jones.
Again, these are your retirement funds.
When you’re making your selections, you need to consider your:
- investment horizon
- comfort with market risk
- desire to make an impact
Values about family, financial security, environment, social justice or other ideas drive any investment decision.
Your comfort with different investments will incorporate all these ideas.
As you develop your investment thesis, know it will always be a work in progress. It’s a good idea to revisit your investment thesis from time to time. Your values and your sense of risk will change over time as you gain more experience and your situation changes.
An IRA Too?
To gain a little more control over your choice of investment you can consider starting an IRA in addition to your company held retirement plan. If your company doesn’t provide a 401(k), you’re between jobs, or if you’re self-employed, this plan may be your best option or your only savings plan.
Nevertheless, if you have a retirement plan at work, you can still set up an IRA in addition to your employer’s plan. Many people have IRAs as well as 401(k)s with their current employer for a variety of reasons:
- Retirement savings they’ve rolled over from a previous job into an IRA
- A choice to take an early disbursement from a company 401(k) to roll into an IRA – (companies allow this option to help their employees diversify their retirement savings. It became more common in 2001 with Enron’s failure and the impact to their employee retirement funds).
At this point I need to pause, I’d be remiss to suggest an IRA on its own if you have a 401k at work. A 401(k) gives you a couple of benefits different from an IRA. First, it generally lets you shelter more of your income from taxes. While your income dictates both 401(k) and IRA contributions, a formula sets the 401(k) limits, while an IRA is a flat dollar amount indexed to the Cost of Living Index (COLI) and determined annually. In 2019, the most you can put into your 401(k) is $19,000*. An IRA maxes out at $6000*. If you’re over 50, check out the opportunity to shelter more.
Maximizing your tax savings is a good idea.
Another benefit for 401(k)s, it may also give an employer match to your contribution.
Take the match!
That match is free money!
Well, at least consider it…
I do know individuals wholly committed to impact investing. Their choice is to not be involved with Wall Street investments.
Take the Match!
For you, however, if you want to receive the match, you’ll put at least some of your money into a Wall Street related plan. This decision to take a match is another place where your unique mix of values helps determine your choice.
Despite what a financial advisor might tell you, even here there isn’t one right answer.
Though I sincerely respect and admire my friends who embrace 100% impact investment, my values, and my financial planning background tell me that for most of us, taking the employer match is a good strategy for long term retirement security.
As you grow and know your retirement goals, you can change your overall retirement savings strategy and figure out how to deploy those funds for your values.
IRAs at Your Financial Institution
Back to the IRA.
If you set up an IRA at your credit union or bank, you’ll have the same decisions you do with your 401(k). You’ll only have available to you, funds and fund families, approved by your financial institution.
All that said, you can take advantage of the flexibility and set up a savings plan on its own or besides your 401(k) at work. All retirement plans have limits based on incomes and the related amount you can save tax-free,.
However, if you are keeping two savings accounts, you need to do a little more homework around what you can contribute and what you can deduct.
You’ll need to check the tax laws and your situation.
Generally, even If your retirement plan is a non-deductible retirement savings plan, you’ll still be able to take advantage of tax-free growth.
So, it’s worth checking out.
Once you’ve decided to set up an independent IRA, you can look for IRAs at a variety of institutions (banks, credit unions, a partner relationship with your tax preparer). But, these first opportunities will likely mirror the same limits you found in your company 401(k) plan: limited investment choice around SRI and ESG investments–
That said, you’ll have flexibility around the institution you choose, which in turn may lead to more unique choice, as well as an opportunity to put your money in socially responsible funds you’ve researched and picked.
It may even provide some unique proprietary notes available only to local investors.
Do Some Research
If this is your route, it pays to get familiar with what’s available both at the institution level, like your credit union, and what’s available at the fund level.
Fund websites or fund manager queries may lead you to an institution that offers the opportunities you want.
You can also go to a broker and open an IRA. There’s been more interest in this approach recently. You can check out some alternatives in this outstanding article by Morgan Simon for Forbes.
One exciting alternative I recently discovered is SWELL.
(and one Morgan mentions in her article)
SWELL is an investment firm with IRAs formatted as Separately Managed Accounts (SMAs) –not mutual funds and not Exchange Traded Funds (ETFs).
SMAs mean you hold actual shares in a company.
SWELL Money Managers select the stocks through a rigorous process that starts with impact themes and turns to measure the impact these companies are making. Undergirding their investment approach is the seventeen UN Sustainability Goals. Each company must show its impact aligns with at least one of the goals.
As A SWELL investor, you get choice over some of your holdings as well. You can ask to remove up to three companies from your portfolio. An SMA solution appealed to my animal-loving professor so many years ago
In a future post, I’ll explore self-directed IRAs.
Does your employer retirement plan offer SRII or ESG funds?
Are you taking advantage of them?
Or, have you decided, like my friends, to be 100% impact with your retirement funds and move away from Wall Street investments?
Share your stories in the comments!