In 2019, several Atoms asked about adding a socially responsible investment fund offering to our 401(k) retirement plan. I took on the task of investigating our options and making a recommendation to our plan sponsor. In this post, I’ll cover the options we had available, describe my process for evaluating options in a way that is consistent with our company values, and share which funds we selected.
As Managing Partner, I run Atomic’s Ann Arbor office with my co-Managing Partner, Jonah Bailey. I’m not a professional financial advisor, and I am not Atomic’s 401(k) plan administrator or fiduciary. I do have a great interest in personal finance and investing, and I’ve given informational talks on those topics in the past.
In the process outlined in this post, my goal was to make a strong recommendation to our plan administrator—backed up by sound reasoning—so they could make an informed decision.
What is a “Socially Responsible” Fund?
What “Socially Responsible” means in the mutual fund industry varies.
The modern mutual fund industry has trended towards offering socially-responsible fund options known as ESGs. ESG stands for “Environmental, Social and Governance.” ESG funds have clearly defined mandates for social good; they vet the companies and products they contain based on some heuristic weighing the E, S, and G components.
I found that many ESG funds generally align with Atoms’ expressed desire to invest in companies that minimize harm to people and the environment. I wanted to identify an available ESG that had broad, clearly-articulated mandates for social responsibility, and that was a reasonable long-term investment option for plan participants.
American Funds is Atomic’s 401(k) platform provider. As part of that service, American Funds makes available a third-party investment fiduciary service provided by Wilshire Associates, Inc. Wilshire reviews the investment options made available to create a “Select List.” The goal of the Select List is to help plan sponsors meet their fiduciary responsibility to provide participants suitable investment options across a variety of asset classes. From the Select List, we choose which specific funds are added to the Atomic 401(k) investment offering. I consulted with our advisor, who sent a list of 12 funds.
I analyzed the list to find the best option for our 401(k) plan based on the following criteria:
- The fund has a clearly stated mandate for social good that we think aligns broadly with Atoms’ values and interests in investing for social good.
- The fund has an acceptably low expense ratio and performance on par (or better than) its benchmark.
- The fund is equity-focused with a broadly diversified selection of US or Total World stocks.
Of the 12 funds in the list our advisor sent, four stood out as potentially good options. I have found that it’s important to read their published prospectus to understand the goals of each fund under review, especially when considering mandates for social good. Upon closer review, three of those four options failed the above criteria:
- Two funds contained no domestic equities (they held only European and Emerging Markets, respectively), failing criteria (3), above.
- One of the funds contained broadly diversified US equities and had a mandate for social good. However, as I dug into its prospectus, I found that it has mandates to not invest in companies that sell contraception or are involved in stem cell research. These are hot-button issues that may make Atoms who want to invest in a socially responsible way uncomfortable. It fails criteria (1), above.
The actual fund that met the three criteria turned out to be the 1919 Funds Socially Responsive Balanced Fund (LMRNX). Considering the three criteria for selection I outlined above:
- The fund has a strong set of socially responsive guidelines in the prospectus.
- The fund employs fund managers to select companies to invest in that meet their ESG mandate (i.e., it’s actively managed), and thus has an expense ratio (0.97%) that is high relative to passively managed index funds. On the other hand, its expense ratio is in line with similar actively managed funds. It has also outperformed its benchmark in the past and carries high ratings from Morningstar.
- LMRNX is a balanced fund currently made up of approximately 65% equities, 26% bonds, and 8% cash.
Adding The Fund
American Funds mandates that 50% of the fund options contained in our 401(k) plan are American Fund products. We have chosen to fill the remaining 50% of our 401(k) with low-cost index funds from Vanguard. My personal feeling is that most investors should choose a diversified portfolio of stock and bond funds (allocated based on their risk tolerance and age) and focus on minimizing expenses. For that, Vanguard funds are a great choice.
LMRNX is not an American Funds product, so we had to either remove an existing Vanguard option or add a new American Funds option along with it. I gathered data on our participants’ fund usage and found that no Vanguard fund in our plan was completely unused, so removing a Vanguard fund would result in someone re-allocating money. Therefore, we made the decision to add an additional American Funds option along with LMRNX.
My hope is that the addition to our 401(k) will be acceptable to those Atoms who want to invest in a socially responsible way and that LMRNX will fit into their broader investment strategy. I’d love to hear about similar decisions you have made for your defined-contribution retirement plans.
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