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Making your 529 plan socially responsible

Posted: 2010-02-05 - Lori Johnston is a freelance writer in Georgia.

by Lori Johnston

Feeling good about your 529 plan investment choices? For some parents, it's not as much about financial return as it is about being socially responsible citizens.

A handful of states -- Virginia, California, Pennsylvania, Illinois and the District of Columbia -- offer socially responsible investment options, providing a niche that attracts some parents and 529 plan owners desiring to exclude companies involved in products like tobacco or alcohol, or focusing their portfolio only on green companies.

"There's a whole segment of the population that believes in socially responsible investing," says Laurent Ross, college savings program manager for Calvert Investments, which manages the District of Columbia's 529 College Savings Plan and offers its Social Investment Equity 529 Portfolio in Illinois' Bright Directions Plan.

Ross' comments bring up a key factor that folks need to consider before embarking on this strategy: Just what is socially responsible investing? Ross and other experts provided answers and shared their tips.

What's important to me?

Your goal may be only to make the most money for your kids' college education. But some folks also want to invest in their children's future in ways other than just making sure they can attend college, Ross says.

"Think about all the people in the United States who don't want to invest in tobacco stocks because they know tobacco is a product that poisons our youth and is designed to be addictive," he says. "You might make more money investing in tobacco. I think people are willing to take a little less gain."

What does socially responsible mean to you?

It can be defined in different ways, depending on the individual.

Allan Roth, CPA, CFP and founder of Wealth Logic in Colorado Springs, Colo., says a fundamentalist Christian could define it as not investing in industries with alcohol and tobacco products while others might focus on companies helping the environment. He recommends that individuals determine what standards are used to screen the investments and how often they're screened, in case a company changes its policies to allow same-sex benefits, for example.

Timing also is a factor. Roth has seen an increase in requests from his Denver-based Wealth Logic clients related to green and energy-efficiency companies when gas prices rose.

"It's a combination of being a good citizen and performance chasing," he says.

Lost returns

Are you willing to give up some investment return in order to be investing in a socially responsible manner? If so, how much?

You will be limiting the universe of potential stocks and to an extent, you could be limiting your investment returns, says Joe Hurley, a certified public accountant and founder of They also typically aren't available in popular age-based options.

"That's not to say they're always going to perform worse," Hurley says. "You really have to go and see those returns to see how they've fared in terms of other types of mutual funds."

Roth says socially targeted funds tend to appeal to investors who want to beat the market and be a good citizen, and both typically don't happen because socially responsible investing restricts the number of stocks an investor can select. "Financial theory would tell us that your earnings might be less," he says. "That's the real pitfall."

Higher costs?

Check out what you are or would be paying in terms of fees and its expense ratio. Niche products tend to be more expensive than mainstream products, Hurley says.

Lost deduction

If you live in a state where you can get a tax deduction for investing in the state's 529 plan, you will lose that deduction by investing in a socially targeted fund offered by an out-of-state plan.

As a result, Roth urges clients to do their socially responsible investing outside of 529 investments.

"The overriding factors are what has the lowest cost and what gives you the biggest tax deduction," he says. "I'm trying to get them as broad as possible (in their investment portfolio), not as narrow as possible."

What's in it for the states?

Since only a handful of states have socially responsible funds, not only will it help keep residents in their funds, it also can lure non-residents to their plans. Calvert has $135 million in assets in the District of Columbia plan it manages and recently gave investors, for the first time, the opportunity to be 100 percent socially responsible in their investment portfolio. An estimated 30 percent of those assets come from residents in other states.

"Why would people outside of D.C. invest in it? They do because of the socially responsible investing," Ross says.

He expects to see more states offering socially responsible investment options, although maybe not to the extent of D.C.'s plans.

Posted February 5, 2010

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