Christian Financial Planner

The Challenges of Socially or Morally Responsible Mutual Fund Investing

When you write articles on behalf of a financial site that has a Christian theme to it, you are often queried about the subject of morally responsible, or socially responsible, mutual fund investing. According to the Social Investment Forum, the amount of money invested in socially responsible funds has gone from just over $10 billion in 1995 to just over $300 billion today, so there’s clearly been a growth in the interest of investing with a higher sense of purpose. Still…is doing so really a good idea for your individual portfolio?

The answer to the question is very personal, and can be a bit complicated. Here, we generally do not support the idea of agenda-driven investing. This is not, of course, because we believe in encouraging immorality or social irresponsibility…but because, pragmatically speaking, the specific pursuit of wealth is not compatible with the specific pursuit of a social or political agenda (unless, perhaps, that agenda happens to be the growth of unbridled capitalism), and so is largely unfeasible as something to be done from within the same mechanism. The pursuit of wealth, by nature, conflicts with the idea of moral or social responsibility. That is a broad statement, and there are certainly exceptions, but you get the general point being made; people who are actively seeking to grow their net worth are just not good candidates for defining the ways in which they grow that net worth on the basis of a distinct and heightened concern for “doing what’s right.” As soon as limits are placed on the kinds of companies in which a fund can invest, that fund is presented with the challenge of having to make do with less; that is, if an otherwise terrific stock prospect happens to have even an indirect relationship with an organization that does not reflect the values of that fund (and its investors), and your fund is sufficiently put off by that, then you will not be invested in that otherwise terrific stock. That is not to say that the fund would be wrong or unwise to make the decision to avoid that company, but the point is that once the fund introduces this sort of dynamic to their consideration process, investors have to be prepared for the prospect of lower returns.

Going further, one of the challenges for Christians is the matter of deciding if a socially/morally responsible fund’s philosophy truly meshes with their own ideas. A lot of socially responsible funds are comprised within philosophies that would be considered very liberal. “Socially responsible” and “morally responsible” are not always the same thing; if you define morally responsible in terms of an adherence to traditional morality, you may find a lot wrong with funds that believe that it’s morally responsible to avoid investment in companies that do not fully support so-called alternative lifestyles. Semantics can be a tricky thing. For Christians, a better term is “faith-based” investing. That gets to the heart of the matter a little better than these others, which leave a lot of room for interpretation. Among the best-known of the faith-based funds are the Ave Maria funds (www.avemariafunds.com), which is a mutual fund family predicated on Catholic values. There are many others, too, including the GuideStone Funds (www.guidestonefunds.org), a Protestant-based option that actually began as a retirement fund for the employees of the Southern Baptist Convention.

Another difficult challenge in all of this has to do with the vetting process of a company that might be included in the portfolio of an agenda-driven fund; the fact that a company might pass the fund’s tests in the broadest sort of way does not guarantee that there is not a lot going on within the company at a deeper level that might violate your sense of morality. For example, a large company that does not offer benefits to same-sex couples might be in keeping with the tenets of certain faith-based investors with regard to that specific issue, but, based on national statistics, it’s likely that many of the people who work there…including company officers…cheat on spouses, drive drunk, use drugs, and/or engage in a lot of behaviors that would hardly be considered morally responsible by the traditional, faith-based investor. The point is that once you start to go down the road of morally evaluating a company, you remember that companies are people, and that’s where things get tricky. You are faced with the difficult task of deciding where the lines shall be drawn, and trying to remain consistent with that standard throughout the evaluation process.

In the end, there is certainly nothing wrong with trying to do what you believe is the right thing, and if you believe that such an effort should have a home in your investment portfolio, so be it. In fact, kudos to you for accepting the chance of lower investment returns in exchange for such a commitment. Just be clear that as soon as you invest in any company at all, with all of the complexities associated with being a company, the intrinsic moral purity of that company becomes a much tougher thing to evaluate, and that morally-based investing becomes less a matter of absolutes, and more a matter of relativism.

James L. Paris and Robert G. Yetman, Jr. 
Christian Financial Planner

None of the information contained in the above article is intended to be, nor should be construed as, a solicitation or recommendation to buy or sell any security, or engage in any financial transaction whatsoever. It should be noted that, at any given time, the author(s) may or may not own any of the securities or other financial products mentioned in this column. Furthermore, it is strongly suggested that you seek the advice of an appropriate financial professional before making any changes or implementing any decisions with regard to your personal financial profile.

How to Make the Best of a 401(k) Plan That Offers Poor Investment Choices

All retirement plans are not created equal - not even close. For starters, just in terms of basic structure and the rules that apply to each, IRAs are not like 401(k)s which are not like variable annuities which are not like defined benefit plans, and so on and so forth. However, even beyond the core differences between plan types, there are the significant differences that can exist within the same plan types; for example, an IRA at a discount brokerage that offers a wide array of investment options, to include stocks and mutual funds, has little in common with an IRA at a bank that is used to shelter a certificate of deposit. Both may be IRAs…but that’s pretty much where the similarities end.

The potential problem is much more significant for those exposed to a company retirement plan in the form of a 401(k). At least with an IRA, you as an individual have the ability to move your IRA from one institution to another in order to take advantage of superior investment vehicle choices. With the 401(k) offered by your employer, you have only that 401(k), and whatever the investment options it contains, at your disposal. If your company’s 401(k) plan contains a wide array of investment options, to include the representation of a variety of different types of stock mutual funds, as well as features like the ability to make allocation changes with great frequency, then it’s fair to say you have a good plan. However, if your company views the 401(k) benefit it offers as more of an afterthought, and has retained a plan custodian that makes available just a few or otherwise poor plan choices, then you have a problem. In that situation, your 401(k) strategy is something into which you need to put some thought in order to realize a worthwhile benefit. What follows are two ideas you might consider to improve your situation if you’re plagued with a 401(k) that seems like dead weight.

Maintain an IRA in addition to your 401(k)

Many people don’t realize that they can have both a 401(k) and an IRA. If your 401(k) is not very good, then plan to use an IRA that’s set up at a good mutual fund family or discount brokerage as a part of your retirement strategy. In that case, you might want to consider investing as much in your 401(k) as it takes to get a full matching contribution from your employer, and then invest any extra you may have as a contribution into an IRA – you can invest up to $5,000 per year into an IRA ($6,000 if you are age 50 or over). If you end up having more to contribute after you’ve maxed out the IRA, then take those monies and shift back to the 401(k).

If your spouse has a decent 401(k), arrange your affairs to prioritize the better plan

If your spouse has a 401(k) plan that is superior to yours, you might want to consider contributing as much as you need to into your own plan in order to receive the full matching contribution from your employer, and then focus on combining and coordinating resources with your spouse to make additional contributions to your spouse’s plan. Maximum annual contribution limits to 401(k)s are $16,500, so you have the ability to still make a huge total 401(k) contribution between the two plans even if you contributed just enough to yours to get the full match from your company.

Of course, if you are a family of super-savers, then you could combine the spousal 401(k) strategy with the IRA strategy and set aside in the neighborhood of $30,000 per year in pre-tax income that can grow tax deferred for retirement. A pair of 35-year-olds who can do that, even excluding whatever matching benefit is realized, could see a total retirement accounts value in the area of $4 million by age 65 (assuming an average annual rate of return of 8%). Just a thought.

The point is that you need not despair if you find that the 401(k) your company provides contains sub-par investment choices. You might have to be a little creative in your efforts to overcome the problem, but it can be done. Remember that with the availability of an IRA to everyone, including those who also have exposure to a 401(k) plan, as well as the ability for married couples who each have 401(k) plans to do some “mixing and matching” in order to prioritize one spouse’s 401(k) over the other’s, the problem of a bad 401(k), while irritating, is by no means insurmountable.

James L. Paris and Robert G. Yetman, Jr. 
Christian Financial Planner

None of the information contained in the above article is intended to be, nor should be construed as, a solicitation or recommendation to buy or sell any security, or engage in any financial transaction whatsoever. It should be noted that, at any given time, the author(s) may or may not own any of the securities or other financial products mentioned in this column. Furthermore, it is strongly suggested that you seek the advice of an appropriate financial professional before making any changes or implementing any decisions with regard to your personal financial profile.