Socially responsible funds have been around for the better part of 25 years, but only lately have they begun to crop up among the investment options in defined contribution plans. Calvert Group, the largest socially responsible fund manager, with $7.7 billion in assets, has recently logged 40 percent of its new sales to defined contribution plans. That has translated to approximately 10 percent of the firm’s assets under management - roughly $700 million in defined contribution plans, up from virtually nothing in 1997.
“Our sales are up 500 percent in this four-year period,” says Craig Cloyed, the president of Calvert Distributors, the marketing arm of the Calvert fund family. He attributes much of this extra boost to the defined contribution market.
Surprisingly, though, the 401(k) king, Fidelity Investments, counts a scant $40 million in socially responsible in-vestments, or SRI, accounts among its $76 billion in defined contribution assets under management from tax-exempt organizations. Still, that $40 million represents more than a 50 percent increase from year-end 2000. “And of course that’s after the haircut from investment returns [this past year],” says Guy Patton, president of Fidelity Investments Tax-Exempt Services Co.
Assets in socially responsible institutional portfolios grew by 36 percent from 1999 through 2001, according to the Social Investment Forum, a membership organization of some 500 fund managers, bankers and community institutions. That growth rate compares with 22 percent for all assets during the same period. The Social Investment Forum cites a total of $2.03 trillion in SRI assets as of late November 2001, while noting that definitions of social responsibility vary across the industry.
“How SRI is defined differs between organizations - both the fund companies and the investors,” says Patton of Fidelity, which offers six SRI funds - four from the Calvert family and one each from Domini Social Investments and Neuberger Berman.
The most common hot button in SRI-screened portfolios: tobacco. Many managers avoid arms manufacturers, liquor companies and casino operators, while keeping an eye on companies’ environmental policies.
Domini Social Investments now manages a total of about $1.5 billion in assets, with about 40 percent coming through defined contribution plans, up from less than 1 percent four years ago.
At Citizens Funds of Portsmouth, New Hampshire, about 38 percent of its $1.5 billion under management is held in defined contribution plans, up from next to nothing in 1998. “We’re seeing most of our growth on the defined contribution side,” reports John Shields, president and CEO of Citizens Advisers, which owns the fund company. “We made an explicit decision back when I started in September 1998 to market to institutions.”
In its portfolio management, Shields says, “Citizens is finding, particularly among the foundations and endowments, that clients want to align their investments with the values of an organization, so that, for example, the American Cancer Society isn’t investing in Philip Morris.”
Beginning last year, employees of Ford Motor Co. could for the first time select an SRI fund for their 401(k). “The UAW had expressed interest in adding socially responsible investment options to the Ford savings plan for hourly employees,” reports Lee Mezza, manager of direct compensation and benefits at Ford. At the same time, the carmaker added a Domini fund for its salaried employees. Some funds have had a presence in the sector for a while. The $4 billion 401(k) for California state employees, for example, has offered an SRI option for eight years.
So far, at least, September 11 seems not to have had a widespread impact on SRI investors - either by increasing interest in the category or by changing the definition of what constitutes a socially responsible investment.
“We haven’t changed the criteria for not investing in weapons manufacturers, says Shields of Citizens. “But we have recently lifted our ban on investing in U.S. Treasuries, which of course, have a secondhand investment in weapons manufacturers,” reports Shields. “The rest of the SRI industry is split about 50-50 over Treasuries.”
Aging angle
With more and more baby boomers retiring - the creakiest of the crowd turn 56 this year - the market for their rollover accounts remains fast-growing and fiercely contested (Institutional Investor, March 2001).
“The IRA rollover market is very attractive and is predicted to eclipse the entire market associated with defined contribution plans in 2002,” says Scott David, president of Scudder Retirement Services.
About $240 billion in assets rolled out of defined contribution plans in 2001, according to Lisa Baird, a consultant with Cerulli Associates. Of that, about $160 billion rolled into IRAs. Cerulli is cautious about forecasting the volume for 2002, given the uncertain response to the higher 401(k) contribution caps, as enacted in the Bush tax package of last May.
Financial services firms approach the market differently: Some believe they can sell to the rollover market directly with no-load funds. Others rely on brokers to identify potential customers, explain to them the particular complications of retirement planning and, finally, sell them load funds for their rollover IRAs.
In general, the no-load mutual fund companies have done slightly better with the rollover market than their rivals. When 401(k) account holders leave a plan (either to retire or switch jobs), providers tend to keep about 20 percent of the assets, the accounts of employees who elect to stay with the same provider. Cerulli found that retention rates for no-load companies range from a low of 15 percent to a high of 38 percent. By contrast, the load companies are keeping somewhere between 10 percent and 25 percent of their rollover assets. That’s partly because the brokers who work with the load companies have incentives to move assets, says Cerulli’s Baird - both to receive commissions and to show 401(k) participants that they provide a valuable service.
A few mutual fund companies (Invesco Funds Group and Scudder Investments, most notably) are withdrawing from the no-load market, sacrificing the potential of rollover revenues in exchange for the distribution muscle that a brokerage can provide across all markets.
Invesco’s exit from the no-load market will be complete in March. Scudder Investments left the no-load scene on January 1. As they contemplate setting up a rollover IRA, “people are only becoming more confused, particularly by the complex tax environment,” says Scudder Retirement’s David, whose firm is capturing about 15 percent of rolled assets. Most employees, he suggests, need guidance from a financial adviser.
Tax considerations can be critical to plan participants. If a 401(k) account is cashed out before the account holder turns 59, the entire balance is taxed as ordinary income. What’s more, there is an early withdrawal penalty of 10 percent. If within 60 days an account rolls over into another 401(k) - and about 3 percent of the lump-sum distributions in 2001, or roughly $5 billion, belonged to job-switchers - or into an IRA, there is no tax liability.
At Northern Trust Retirement Consulting, with some $36.4 billion in defined contribution assets under administration, about 18 percent of all distributions (roughly $4.4 billion in 2001) went into cash, incurring the roughly 38 percent combined penalty and tax bite. In mid-December Northern Trust announced a new effort to capture these rolling assets, with a goal of retaining 10 percent in 2002. In this new regime, the plan sponsor client will have to give the go-ahead for Northern Trust to get in touch with participants. “In the past, the only time we talked about rollovers was at the participant’s initiative,” explains Serge Boccassini, Northern Trust’s director of product development.
Now, when a participant is about to take a distribution, Northern Trust will send that person a packet of information on rollover products. The Web site directs the participant to the options for reinvesting those funds, with the hope of keeping the assets at Northern Trust. “People will be able to handle the entire process on the Web, without even getting a check,” says a hopeful Boccassini.
Scudder Retirement has found that the Internet is not an effective channel for offering guidance to workers about to retire. “We have a very low utilization of our Internet-sold advice products - less than 1 percent,” reports Scudder Retirement president David. His company offers 401(k) participants the services of Financial Engines, which provides investment advice but no other services.
With a total of about $2.2 billion in defined contribution assets under management and with about $200 million of that rolling over in 2001, Strong Capital Management captured roughly 17 percent of those funds. “For 2002 our aim is to capture 25 percent of distributions,” says Julie Kozlowski, manager of the 401(k) rollover strategy.
That’s an ambitious goal - but not an impossible one. - J.St.G.
