DO-GOOD FUNDS GO FOR GOODS IN 401(K)S: FEDS’ OK TRIGGERS A RUSH TO SELL INVESTMENT NICHE TO RETIREMENT PLANS

Managers of socially responsible mutual funds are pushing for green in the retirement market, not just in the environment.

Backed by a nod of approval this summer by the U.S. Department of Labor, a number of do-good fund families are aggressively pursuing the highly competitive 401(k) and pension plan markets.

Calvert Group, the industry’s leader, is assembling a nationwide sales team to plug its eight socially screened funds to consultants and executives. Citizens Funds, in Portsmouth, N.H., recently hired an executive from Putnam Investments to oversee its efforts to crack the retirement market.

Other fund families scrambling to gain a foothold in the nation’s $9 trillion retirement market include New York City’s Domini Social Investments and Delaware Investment in Philadelphia.

‘going mainstream’

“Socially responsible investing is going mainstream,” says Craig D. Cloyed, national sales manager at Calvert Group in Bethesda, Md., which recently got one of its socially responsible funds added to Delta Airlines’ 401(k) plan.

Socially responsible funds typically avoid investing in companies that manufacture tobacco or alcoholic beverages, sell weapons and operate gambling casinos or nuclear plants. They tend to favor companies with good environmental records and employee relations. About $6.85 billion is invested in 59 socially responsible mutual funds, up from $4.18 billion in 50 funds at the beginning of 1997.

The push into the retirement arena comes as some socially responsible funds are meeting — or beating — the returns of their presumably socially unconscious peers.

Take the Noah fund, which started about two years ago in Philadelphia. Its return for the year ended Aug. 21 is 30.53%, compared to the average 17.77% return posted by other large-cap funds. Of the 42 funds tracked by the Social Investment Forum in Washington, 23 have a coveted five-star rating from Morningstar Inc., the Chicago fund tracker.

While the fund groups insist the favorable returns are due to their good-guy investment style, more likely they come from the bull market. It has been particularly kind to large-cap stocks, and larger companies tend to have the established employment policies — from affirmative action programs to benefits for same-sex partners — favored by many socially responsible funds.

Even so, persuading corporate America to look kindly upon money managers who base their investment decisions on whether a company wheels and deals in vice won’t be easy. Only about 16% of employer-sponsored retirement plans offer socially responsible mutual funds, according to the results of a late 1996 study by Calvert Group.

“I certainly haven’t seen a real demand for socially responsible products,” says Bruce Kosakowski, a director at Watson Wyatt, a Washington pension consultant, “although I did just receive some literature for a socially responsible fund.”

Plan sponsors have been reluctant to use socially responsible funds for two reasons: if the funds underperform, participants could charge them with violating the Employee Retirement Income Security Act (Erisa) by putting social interests ahead of fiduciary responsibilities; and investing with one’s conscience can be expensive.

The first problem may be a thing of the past. A letter sent in June by the Department of Labor’s Robert Doyle, director of the Office of Regulations and Interpretations, to Calvert general counsel William Tartikoff states that socially responsible funds may be offered in retirement plans as long as returns are on par with their peers’.

“It’s a wonderful letter,” says Amy Domini, founder and manager of Domini Social Index Trust, a 400-company index fund screened for social considerations. “The perception has been that there was an Erisa problem with offering these funds. That is just wiped away in one letter.”

The expense problem, however, won’t go away. For every $1,000 invested in a socially responsible mutual fund, the typical investor pays $15.30 in expenses, vs. $13.30 for the average mutual fund, says Morningstar. The $350 million Citizens Index fund, which includes 300 socially screened stocks and is designed to mirror Standard & Poor’s 500 stock index, has an expense ratio of 1.59%, vs. .56% and 1.53% for the average index and stock fund respectively, according to Morningstar.

“If the (socially responsible) fund groups really want to accumulate serious assets, they’re going to have to think again about those expense ratios,” says Dean Scofield, a financial adviser at Pinney & Scofield in Cambridge, Mass. with $60 million under management.

Not necessarily, says Alisa Gravitz, executive director of Social Investment Forum in Washington: “People want to invest in line with their beliefs. And they’re willing to pay a little teeny-tiny bit more to do that.”

Still, with the Department of Labor’s letter in hand, many socially responsible fund groups are gearing up to tackle the retirement market.

Citizens Funds, which has $700 million under management, this spring hired Michael Keenan to lead its charge into the 401(k) and defined benefits markets. The former Putnam executive has already inked deals with a handful of companies, including Consumers Union, publisher of Consumers Reports.

“We’ve got a very extensive list of people that we are in ongoing contact with,” Mr. Keenan says. “It’s a very lengthy process.”

In the past year, Domini has forged alliances with such outfits as Fidelity Investments, Charles Schwab Corp., Vanguard Group and American Express Co. to distribute its $500 million index fund to the 401(k) market. Institutional money accounts for 15% of the fund’s assets, up from 1% a year ago.

Calvert, which manages $5.6 billion ($1.5 billion of it in socially responsible mutual funds), is courting plan sponsors by appealing to pension fund consultants and advertising in trade magazines. Its new institutional sales force is also gearing up for direct calls on sponsors.

“I think we’ll get a pretty warm reception,” predicts Calvert’s Mr. Cloyed. “Although, I’m not exactly sure what kind of penetration we’ll have initially.”