Socially responsible investing with 529 plans
Socially responsible investing (SRI), also known as sustainable or value-based investing, is a strategy that considers social or environmental factors in addition to financial return. This can also include avoiding investments in things like alcohol, tobacco or weapons manufacturing. According to a study by Morgan Stanley, the number of millennial investors who were “very interested” in SRI grew by 38% from 2015 to 2017.
As interest in socially responsible investing (SRI) continues to grow, so do the number of SRI mutual funds, ETFs and other investments available. However, families saving for education may have a difficult time finding SRI investment options within 529 plans. In fact, there are no age-based SRI options, just a few standalone portfolios.
SRI options in 529 plans
Prior to 2017, when it ended its contract with Calvert Investment Management, the DC College Savings Plan offered the most comprehensive SRI portfolios available through any 529 program. Today, however, the Plan’s options are much more limited with its new program and investment manager, Ascensus College Savings.
According to Andrew Bellak, founder and CEO of Stakeholders Capital, a wealth management firm that is committed to integrating client values with financial goals, the DC College Savings Plan now offers just two SRI funds in their individual portfolio lineup, both sub-advised by Dimensional Funds (DFA): the U.S. Total Stock Market Portfolio and the Non-U.S. Total Stock Market Portfolio. Currently, the Calvert Equity Portfolio is offered through Illinois’s Bright Directions Advisor-Guided College Savings Program.
Bellak points out that there’s an important difference between Calvert and conventional managers like DFA – shareholder advocacy, activism and engagement.
“This is when the SRI fund companies engage directly with the companies in which they invest in an effort to get those companies to improve their policies and practices,” he said.
Firms such as DFA and Vanguard offer sustainable options, but they choose not to engage companies beyond SRI screening and proxy voting. The Vanguard Social Index Portfolio is available as a standalone option through Pennsylvania’s 529 Investment Plan.
According to Bellak, Parnassus and TIAA are two other investment managers that communicate directly with the companies they invest in. Families have access to TIAA’s Social Choice Investment Portfolio through California’s ScholarShare College Savings Plan, the Connecticut Higher Education Trust (CHET), Oregon’s College Savings Plan, Michigan’s MI 529 Advisor Plan, Texas’s Lonestar 529 Plan and Wisconsin’s EdVest. Virginia’s Invest529 offers the Socially Targeted Portfolio, which invests entirely in the Parnassus Core Equity Fund.
TD Ameritrade will be adding ESG portfolio options to the TD Ameritrade 529 College Savings Plan in November 2019. With ESG investing, the investment manager evaluates a company’s environmental, social and governance factors, along with traditional financial analysis, when selecting stocks.
Does your 529 plan invest in guns?
To some investors, what’s not in your portfolio is just as important as what is in it. In the wake of the Parkland, Florida shooting, where 17 high school students were killed, many Americans are concerned about exposure to gun manufacturers. According to report from Morningstar, if you invest in mutual funds containing U.S. small cap stocks, which are found in most index funds, you’re likely investing in guns.
The AR-15, the weapon used in the massacre, was manufactured by American Outdoor Brands (formerly Smith & Wesson), a publicly traded company owned by nearly 200 index funds, according to Morningstar. Sturm Ruger and Vista Outdoor also have versions of the AR-15 and are found in over 200 index funds.
To help investors find out if they are exposed to gun company stocks, Morningstar has created a list of funds that hold positions in American Outdoor Brands, Sturm Ruger and Vista Outdoor. To find out if your 529 plan invests in any of these funds, you’ll need to review your plan’s underlying investments to see if they are on the list. These can typically be found on your plan’s website, or on the investment options detail pages on Savingforcollege.com.
For example, according to the list, American Funds Growth Fund of America held the largest position in Sturm Ruger, with 5.35% of shares. This fund is available through Virginia’s College America, the largest advisor-sold 529 plan in terms of assets.
The Vanguard Small Cap Index Fund and had large ownership positions in American Outdoor Brands. The Vanguard Small Cap Index Fund is available through Louisiana’s START Saving Program.
If you find that your 529 plan is invested in guns through an underlying index fund, know that the exposure is very minimal and should not have a material impact on your investment returns. You may also want to find out how the firm is addressing social concerns. Morningstar notes that while BlackRock and State Street will be engaging with gun manufacturers and distributors to learn how they will promote responsible use of their products, Vanguard and Fidelity are not addressing political and social concerns with the companies they invest in.
If there is something in your 529 plan portfolio that you’re not comfortable with or would prefer to add an SRI option to the mix, remember that you are allowed two investment changes per year. If your program doesn’t offer what you’re looking for, you are allowed one tax-free rollover in a 12-month period. Just be careful if you’re currently using your home state’s plan and have claimed a tax deduction or credit. If you switch to an out-of-state plan you may be subject to recapture.
A good place to start