Federal employees looking to adopt a more socially responsible approach to their retirement savings plan may find that it’s not an easy — nor necessarily more profitable — thing to do.
That’s the finding of a recent report released by the Government Accountability Office after investigating the plus and minuses of adding a socially responsible investment (SRI) option to the government’s Thrift Savings Plan (TSP).
SRIs are plans that make investments employing socially conscious criteria, taking into account the environmental, religious or corporate impact of the investments. In 2010, SRI mutual funds based in the U.S. exceeded $300 billion in value.
Congress has proposed that the TSP consider making other investment options, including SRIs, available to feds. The GAO investigated what difficulties might arise from adopting an SRI option. It also tracked the performance of an SRI index in comparison with the past performance of the TSP stock fund portfolio. [See Table]. In addition, it compared the costs and performance of SRI mutual funds to non-SRI mutual funds.
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Socially Responsible Investments
* Recession period
Source: Government Accountability Office analysis of annual rates of total return based on monthly data from Morningstar, Inc.
GAO compared the rate of return of the TSP stock portfolio (Common Stock, Small Capitalization and International Capitalization) from 1992-2011 to the best- performing SRI stock index based in the U.S. over the same 20-year period.
It found that if an SRI fund were combined with the three stock funds, investors would have received lower returns and volatility. Substituting the SRI for the Common Stock fund and combining it with the remaining funds would have resulted in lower returns and higher volatility. Likewise, substituting the SRI for the International Capitalization fund and combining it with the remaining funds would have led to higher returns and volatility.
In comparing the overall performance of the TSP stock portfolio to the same SRI stock index over the same 20-year period [see graph], GAO concluded that although the SRI fund produced a higher cumulative return than the three TSP funds over the full 20 years, in the last 10 years, it posted lower cumulative returns than the other three funds.
Barriers to adopting SRI
According to the report, GAO identified three barriers standing in the way of the TSP easily adopting an SRI option:
TSP is prohibited from offering an option that overlaps with an existing fund. It would be difficult for TSP to find an SRI index fund that did not overlap with one of its five funds.
TSP would have trouble finding screening criteria acceptable to Congress and all participants.
Costs for adding another option would be divided among all TSP participants whether they chose the new option or not.
The Federal Retirement Thrift Investment Board, which manages the TSP, could offer an SRI mutual fund option managed outside the TSP, the report says, in which those who choose that investment would pick up the costs.
More than 4.5 billion federal employees participate in the government’s TSP, which is valued at $308 billion. The plan offers five inexpensive investment options as well as a service that lets feds invest in mutual funds outside the TSP.