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Moral Objections to the Funds in Your 401(k): What Can You Do?

By Louis DeNicola

When you contribute to your 401(k), you can often choose to invest your money in one or several funds. These funds, in turn, invest in dozens or hundreds of individual stocks. As a result, you become a partial (albeit likely a very, very small) part-owner of those companies. That may be an exciting prospect for some investors; after all, diversifying your portfolio is always a good thing. But what if one of those companies operates in a sector that goes against your values? Perhaps that company makes guns and you support gun conrol and tougher gun laws; perhaps they sell alcohol or tobacco products and you don’t feel that is worth your investment; maybe they operate casinos and you don’t condone gambling. If you have moral or religious objections to the company’s business, you may not want to be one of its investors. While it may be difficult to lead a 100% moral life, it’s always empowering to take as much control as you can over the things that matter most to you. Here, we’ll propose six options to help you stick to your principles while being financially responsible.

Review the fund options and lobby for changes

This is pretty straightforward: Look for funds within your 401(k) plan that don’t include the objectionable companies. For example, you might be able to invest in a government bond (debt) fund. In fact, while it does come with certain risks, Human Interest allows you to choose your own funds if you’d like. If you’re already using Human Interest, we offer a few socially responsible funds:
  • TIAA Social Choice Equity Fund
  • Vanguard FTSE Social Index Fund
  • TIAA Social Choice Bond Fund
Note that in order to select these, you’ll simply have to opt out of our automatic investment advising and choose these funds yourself. Check out these and the other funds we offer on our Investment Funds and Philosophy page. If you’re not using Human Interest, and you don’t find any such funds with your current provider, you could ask your plan sponsor — likely your company — to request additional options. Mark Struthers, CFP®, CFA, the president of Sona Financial in Chanhassen, Minnesota, says this may be the best option because it shouldn’t be too hard for the sponsor (often decided upon by your employer or HR department) to add at least a few socially responsible investment (SRI) or environmental, social, and governance (ESG) funds. Related article: SRI and ESG – Is There a Difference? (EngagedInvestor)

Understand the investment breakdown

Make an educated decision when you decide where to invest. Before turning your back on a fund altogether, take a close look at exactly how much of the fund is made up of companies you oppose. You may be able to do this by visiting the fund family’s website, contacting the fund company, or hiring a financial planner. Then, ask yourself how much (percentage-wise) of an objectionable fund you’re willing to tolerate. Struthers has conducted such an analysis for a client. “There was one unacceptable individual company bond that made up 0.30 percent of the entire fund and would make up 0.002 percent of their portfolio. They could live with that,” Struthers said.

Contribute just enough to get the match and save the rest of your money elsewhere

If you find an option that you’re comfortable with, Struthers says you can contribute enough to get the employer’s match and then invest money in a different account to balance your portfolio. Contributing the minimum amount to your 401(k) to receive the match is a smart financial decision — it’s like receiving a tax-free bonus, so this is highly recommended even if you want to save the bulk of your money elsewhere. Read more about this here: Is a 401(k) Match Tax Deductible? In terms of other retirement options, the most common is a tax-advantagedIndividual Retirement Account (IRA), which will allow you to invest in a wide variety of companies, funds, and other financial products. However, you’ll only be able to contribute $5,500 ($6,500 if you’re 50 or older) to the IRA, as opposed to the $18,500 cap ($24,500 if you’re 50 or older) with a 401(k).

Make an offsetting donation

Perhaps you’re opposed to investing in an oil company. Although you want to invest in a target-date fund because it’s convenient, that fund happens to hold shares of an oil company. You could make the contributions to the target-date fund in your 401(k) and buy carbon offsets or donate money to a worthwhile charity to “even out” the investment.

Ask about self-directed options or an in-service rollover to an IRA

Many companies’ 401(k) plans require you invest in the pre-selected funds and keep the money with in the 401(k) plan while you’re an employee. However, there are some exceptions according to Tyler Landes, CFP®, AIF®, founder of Tandem Financial Guidance in Kansas City, Missouri. Your 401(k) plan might have a self-directed option that lets you move a portion of your money into a sub-account and invest it how you see fit — although there could still be some limitations. Sometimes 401(k) plans also let you make an in-service rollover, and you can transfer money from your 401(k) to an IRA while you’re still an employee. Once it’s in the IRA, you could have more control over where you invest. Check with your plan administrator to see if this is an option, and to learn about possible restrictions, such as age or tenure.

Bottom line: It’s a personal decision

Your 401(k) offers tax advantages for your retirement savings, and an employer’s match could substantially increase your savings. If you feel stuck and don’t want to invest in the available funds, consider the above possibilities and you might find that there’s a route (or combination of routes) that works for you.