Today’s college savers want more from their investments than just solid returns. Socially responsible investing (SRI) and environmental, social and governance (ESG) investing incorporate ethics into the investment process. Many investment managers use a combination of these strategies to offer investments that align with certain values and beliefs. Nine 529 plans currently offer sustainable portfolios, and the TD Ameritrade 529 College Savings Plan is adding ESG investment options in 2019.
Types of responsible investments
ESG investing is a relatively new investing concept. An ESG strategy takes environmental, social and governance factors into consideration during the stock selection process. Environmental considerations may include waste management and water quality, natural resource and land use, pollution and waste and climate change. Social issues may include labor standards, health care, education, safety and quality. Governance refers to factors like ethics, executive level salaries, diversity of board members and accounting transparency. These factors are used alongside traditional financial analysis to identify investments that match certain values.
Another type of sustainable investing is SRI, which has been around since the 1970s. The main difference between SRI and ESG is that with SRI, investment managers use negative or ethical screens to exclude certain companies. Examples include companies who are associated with weapons, alcohol and tobacco. SRI allows investors to avoid investing in companies that do not align with their values and ethical standards.
With both ESG and SRI strategies, a company’s financial standing is evaluated along with sustainability factors.
Responsible investments in 529 plans
Each 529 plan offers a choice of investment options based on the 529 plan account owner’s risk tolerance and investment time horizon. Generally, 529 plan investment options include:
- Age-based portfolios that automatically shift toward more conservative investments as the beneficiary gets closer to college
- Static portfolios that are based on a specified level of risk (conservative, moderate, aggressive) and asset allocations do not change
- Individual investment, or, single-fund options, which invest in a single mutual fund
Most socially responsible investments available in 529 plans are available as single-fund options. However, many families who invest in direct-sold 529 plans select an age-based investment option. An age-based asset allocation allows families to apply a “set it and forget it” strategy when saving for college. This could be beneficial during a market downturn, since the portfolio is designed to shift toward safer assets over time regardless of market activity.
Families can include socially responsible investments in their college savings strategy by investing all or a portion of their 529 plan assets into one of these options. For example, a family could invest 75% of their assets in a 529 plan’s age-based portfolio and the remaining 25% of their assets in an ESG portfolio. Investment changes can be made twice per year without tax consequences, or an unlimited number of times when the investment change is made with a beneficiary change.
As shown in the table, 10 states offer ESG investments. TD Ameritrade is launching new ESG 529 plan portfolios in November 2019.
529 Plans Offering Sustainable Investment Options
Social Choice Investment Portfolio
Social Choice Option
Calvert Equity 529 Portfolio
TIAA Social Choice Equity Portfolio; TIAA Social Choice Bond Portfolio
Launching November 2019
TD Ameritrade Investment Management
Social Choice Balanced
Social Index Portfolio
Socially Responsible Portfolio
Social Choice Portfolio