Considerations Before Investing in Socially Responsible Funds

Societal concerns are gaining more attention, and with that visibility, more companies and 401(k) participants are looking to invest their money in a cause they believe in.

A growing demand for socially responsible investing (SRI) has spurred an increase in the number of socially responsible mutual funds. While SRI fund options have grown considerably over the last decade, at the end of 2011 there were more than 7,500 mutual funds in existence, but only 333 claimed to be socially responsible. 

The increased interest in SRI funds has prompted many plan sponsors and financial advisers to take a deeper look to determine if they are in a plan sponsor’s best interest of meeting their retirement plan’s investment goals. Before selecting an SRI fund, plan sponsors need to consider six key factors.  

The definition of social responsibility

There is no single approach to social responsibility. Social responsibility does not mean the same thing to everyone. The four main areas SRI mutual funds focus on are the environment, social issues, governance and products. In addition, how they achieve this social responsibility can differ from fund to fund. Some mutual funds may focus on excluding investments in certain areas whereas others seek to specifically include investments with positive impact for the cause. It is the financial adviser and plan sponsor’s responsibility to determine what socially responsible investing means to them and to align with that definition when reviewing funds.

Review the fund expenses

While common sense tells us that paying more should mean getting more, studies have shown that low fees are an indicator of better performance. Funds with lower expense ratios often earn higher returns. If a socially responsible mutual fund charges more than its non-social counterpart, it may earn lower returns because it needs to outperform to compensate for that fee difference. 

A majority of SRI funds are actively managed, meaning that their expense ratios are higher than low-cost index funds. A quick search on Morningstar for institutional share classes of SRI mutual funds shows that the average expense ratio is 0.9%. While plan sponsors and financial advisers vary in their opinion of expenses that are considered high, the average expense ratio of all of the investments on our approved list of investments is 0.39%.


Is the fund diversified?

Diversification is an important factor in any portfolio. Having a broadly diversified portfolio can help reduce the overall investment risk. When looking at a well-known mutual fund family that offers more than 120 funds, we found it had just one SRI fund. That SRI fund holds about 375 individual securities, which is less than half of the holdings in that fund family’s comparative index fund. SRI funds naturally tend to have less diversification because they are carving out investments.

What is the fund’s performance?

Long-term performance is one of the most meaningful factors for investors. Funds should have at least a three- to five-year track record for fiduciaries to determine if it is a prudent option. The recent surge in SRI funds means many are relatively new and do not have a long-term track record. Advisers and plan sponsors also need to compare performance of the fund with that of a non-social counterpart. Looking at a large mutual fund company’s SRI fund performance for one year, we found it outperformed similar index funds. However when we looked at the three-, five- and ten-year record, the SRI fund underperformed by up to 2.5%.

Are plan sponsors meeting their fiduciary responsibility?

Plan sponsors are responsible for hundreds or thousands of participants and have a fiduciary duty to those in the plan. Fiduciaries need to remember their primary goal is helping to secure the retirement of plan participants. This responsibility means that plan sponsors must be able to prove the funds chosen are in the participants’ best financial interests. The plan’s investment professional should help to guide the plan sponsor in understanding if the investments selected meet this responsibility.    

What are additional ways investors can contribute to the cause?

After reviewing funds, advisers and plan sponsors may determine that there are no SRI funds appropriate for the retirement plan, but it is a good idea to encourage other meaningful ways participants can contribute outside of the retirement plan. There are many different approaches for people to get involved in social causes such as volunteering their time, donating money or becoming involved with a lobbying group.


The role of a plan sponsor is to step back and review funds from a fiduciary standpoint. Plan sponsors and advisers need to make sure that if participants are looking to invest in funds that are socially responsible, the funds are also financially responsible.


Tara Mashack-Behney, CFP, ChFC, is partner and president of Conrad Siegel Investment Advisors Inc., an independent investment and financial advisory firm based in Harrisburg, Pennsylvania. The firm is a fee-only registered investment adviser that provides portfolio management and financial planning services for both individual and institutional clientele.  

The opinions expressed in this column are solely the writer’s and do not necessarily reflect the opinions of Asset International or its affiliates. Before acting on any financial advice, readers should consider whether it is suitable for their circumstance and consider seeking advice from a financial or investment adviser.