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Socially Responsible Investing in Your 401(k)

Only about 3% of 401(k) plans currently offer SRI funds1—which use environmental, social, and governance (ESG) criteria to guide their investment decisions—but that figure may rise as investors push for funds that both align with their values and deliver competitive returns. Indeed, one survey found that 56% of plan participants prefer investing in socially responsible companies.2

Growing good

In 2018, $11.6 trillion in assets were managed using ESG criteria in the U.S. alone—a 43% increase over 2016.

Source: Report on US Sustainable, Responsible and Impact Investing Trends, US SIF, 2018.

“If investing with your values is important to you, SRI funds are a great way to go—provided they fit your goals,” says Michael Iachini, vice president and head of manager research at Charles Schwab Investment Advisory. “For example, retirement plans that offer SRI funds typically have only one option, and that option may or may not be the best fund for you.”

Here are four questions to consider when selecting SRI funds for your retirement portfolio.

  1. What’s its focus? Some funds broadly integrate ESG criteria into their investing practices or focus on companies that aim to solve specific environmental or social issues, whereas others exclude certain kinds of companies—such as those that sell tobacco products.
  2. Does it have a solid track record? “Generally speaking, you want to see a track record of at least three years to ensure the fund’s strategy is sound and not just a flash in the pan,” Michael says.
  3. Is it diversified? Because SRI funds tend to focus on a narrower slice of the market, they may offer less diversification than, say, a broad-based index mutual fund or exchange-traded fund (ETF). For example, the VanEck Vectors Environmental Services ETF—which invests at least 80% of its assets in the stocks of companies involved in the environmental services industry—allocates a whopping 41.67% to its top five holdings.3 “At such high concentrations, a single stock could have undue influence on the performance of your portfolio,” Michael cautions. “If that concerns you, look for funds with lower allocations to any one company.”
  4. What’s its annual fee? Every dollar you pay in fees is one you can’t invest for future growth—and that’s doubly important when it comes to your retirement savings. “Some SRI funds charge astronomical fees while others are more on par with low-cost index funds,” Michael says. “Be sure you know what you’re paying before you invest.”

If your workplace retirement plan offers limited SRI choices—or none at all—consider investing through an individual retirement account, which typically provides access to the same investment options as a traditional brokerage account.

1Ron Lieber, “How to Get Socially Conscious Funds Into Your 401(k),” nytimes.com, 01/10/2020. | 2The Cerulli Edge—U.S. Retirement Edition, Trends to Watch in 2019, Q1 2019. | 3Schwab.com, as of 05/22/2020.

What You Can Do Next

  • Learn more about socially responsible investing.

  • Schwab clients: To research SRI mutual funds for your portfolio, log in to the fund screener and select Socially Conscious under the Basic Criteria dropdown. To research SRI ETFs, log in to the ETF screener and select Socially Conscious under the Portfolio dropdown.

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Important Disclosures

Investors should consider carefully information contained in the prospectus, or if available, the summary prospectus, including investment objectives, risks, charges, and expenses. You can obtain a prospectus by calling Schwab at 800-435-4000. Please read it carefully before investing.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Diversification and asset allocation strategies do not ensure a profit and do not protect against losses in declining markets.

Investing involves risk, including loss of principal.

Socially screened funds exclude certain investments and therefore may not be able to take advantage of the same opportunities or market trends as funds that do not use social screens.

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