Socially Responsible Investing and Fiduciary Duty

August 9, 2005 (PLANSPONSOR.com) - A paper published in the current edition of the Journal of Deferred Compensation examines the use of socially responsible investing (SRI) in retirement plans and the question of fiduciary duty.

SocialFunds.com reports that the  paper , “Retirement Investment, Fiduciary Obligations, and Socially Responsible Investing,” says “there is nothing intrinsically contrary to fiduciary duty involved in an investment advisor’s use of SRI investment strategies.”  

The authors, George Gay and Johann Klaassen of the First Affirmative Financial Network, recognize that different people bear the responsibility for SRI choices in different types of retirement plans, but state that SRI strategies are not irresponsible choices for self directed, defined contribution, or defined benefit plans.

The authors address again two of four questions posed in their  2003 article “Fiduciary Duty and Socially Responsible Investing:”

  • How do planners assemble an adequately diversified portfolio with such constraints?
  • How do financial planners reconcile the conflict between achieving the client’s desired goals and the return drag that constrained investing places on the client’s portfolio?

Diversification

The authors of the article say, although it is difficult to create an SRI portfolio with diversity across asset classes, current computer modeling tools make it just as easy to create an efficient SRI portfolio as a non-SRI one.

In a recent Plugged In session (See  Q/A: Plugged In: Doing the Right Things ), Mark Davis, president of Mark A. Davis Consulting, told PLANSPONSOR that a quick screen on Morningstar for 10-year track records turns up 41 choices across a broad spectrum of asset classes.  

The actual factor that can cause diversification issues is participant choice, a s SocialFunds.com points out.  Too many options tend to overwhelm participants and only one option can lead to participants investing all of their funds in that one choice.

Performance

Gay and Klaassen debunk the myth that SRIs consistently underperform in the market by citing studies that show the opposite to be true.

SRIs are typically held to the same standards as non-SRI investments.

After addressing the concerns of diversification and investment performance, two questions remain that will always cause some difficulty when including SRI options in any retirement plan. Who decides which social and environmental issues to support when choosing investment options, and what research and screening will be used to make option decisions?

As SocialFunds.com pointed out, the fact that SRI funds span a wide spectrum of values, from funds that screen producers of abortifacients to those that reward corporate support for Planned Parenthood, can lead to the charges of trustees politicizing their fiduciary decisions.

But, as Gay and Klaassen conclude in their article, “Certainly some practical problems could make it extremely difficult [to employ SRI], and some political problems could make it almost impossible, but retirement plan trustees do not have a fiduciary duty to choose the easiest course, or to avoid controversy.”  

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