Sharing the wisdom of five financial advisers in socially responsible investing (SRI).

By Graham Sinclair

It is possible today to construct a prudent, complete, and balanced retirement plan using solely socially responsible investing (SRI) vehicles. To show how it can be done, Business Ethics invited five investment advisers to construct retirement plans for five different families and individuals of different ages and financial situations. (Names have been changed to protect privacy, and some persons represent composites).

In drafting their plans, the advisers drew from the many SRI mutual funds, which now number over 200 and cover virtually every asset class, from small-cap equity and income funds to hedge funds and exchange traded funds (ETFs). October saw the launch of the Domini European Social Equity Fund. Calvert added Asset Allocation Funds to its family of 30 mutual funds in May. And a new ETF by Barclays Global Investors tracks KLD's Social Select Index. There are even new SRI options for 529 College Savings Plans.

As you read the retirement plans below, you'll see that good, old-fashioned financial wisdom still applies. It starts with choosing a professional adviser you trust (see www.socialfunds.com for a list of SRI advisers), includes planning with goals in mind, and ends with revisiting your plan at least annually. Business Ethics does not offer investment or financial planning advice -- for that, you should contact a professional. But it's not often any of us gets to peek at how others are planning for retirement -- particularly, how they are using SRI options. For this informative treat, read on.

Eric W. Bright, CFA
President, Pennyfarthing Investment Management
Belchertown, Mass.
As founder and president of Pennyfarthing Investment Management, L.L.C., Eric Bright has five clients with $1.2 million assets under management, all in socially responsible investments. "What started me down the ethical road was that my dad was a policeman," he said. "Accountability for one's actions is as important for corporations as it is in the world of cops and robbers." He added, "I believe that a wasted life would be to work only for money's sake." After working with the Securities and Exchange Commission and another investment adviser, Bright launched his own firm three years ago, focused on SRI. Assets under management have more than doubled in the last year.

Jonathan and Marie, 35 and 31
Income: $90,000
Expenses: $78,000
Assets: Total $444,000: ($400,000 House; $30,000 403(b); $10,000 CDs)
Liabilities: Total $295,000 ($250,000 Mortgage; $25,000 Student loans; $16,000 Car loans; $ 4,000 Credit cards)

Bright prepared a retirement plan for "Jonathan" and "Marie," aged 35 and 31, a couple with no children and joint income of $90,000. They typically have $1,000 left over each month after bills. In assets, they have $10,000 in certificates of deposit (CDs), and $30,000 in 403(b) plans, which are employer-sponsored plans like the 401(k). Their home is valued at $400,000, with a mortgage of $250,000 at 5 percent. Other liabilities include student loans of $25,000 at 9 percent, car loans of $16,000 at 8 percent, and credit card balances of $4,000 at 18 percent. Jonathan and Marie's values include concern for the environment and their local community in western Massachusetts. They plan to work 30 to 35 years before retirement. With this long-term horizon, Bright said the appropriate investment style is growth. Since their employers' retirement contributions are limited, they must rely on their own ability to save.

Bright suggested Jonathan and Marie first pay down debt before adding to savings. They should start by paying off credit cards, and next refinance student loans with a consolidation loan at 5 percent interest. The next step would be to establish IRAs, each contributing up to $4,000 annually, increasing over time. Once IRAs are fully funded, employer retirement plans should be funded to the maximum. Savings should be $1,000 every month (or 15 percent of income).

With 403(b)s, Jonathan and Marie were oriented toward balanced, growth, and international stocks. Bright recommended they pursue value-oriented or smaller company investments to diversify. They should also lobby their employers for ethical options in the 403(b), like TIAA-CREF Social Choice Fund. Once they have some savings together, Bright recommended they allocate 60 percent to U.S. equities, 20 percent to global equities, 10 percent to bonds, and 10 percent CDs. CDs should have maturities of from one to three years. These deposits can be made at any FDIC-insured bank. For social investors, preference can be given to a local bank or a credit union that supports the local community, like Greenfield Savings Bank in western Massachusetts.

For equity investments, Bright recommended the SRI mutual funds Pax World Balanced and Portfolio 21, which have low expenses and solid returns. Pax World Balanced (which is two-thirds stocks and one-third bonds) has an outstanding track record, putting it in the top 10 percent of all funds in its category over ten years. The fund is screened to exclude alcohol, gambling, tobacco, nuclear power, weapons, and defense companies. It's also involved in shareholder activism.

Portfolio 21 is a solid choice among global funds, which invest both domestically and overseas. Its three- and five-year performance record is not outstanding, but it's decent, Bright pointed out. This fund is good for those with environmental concerns, since it invests only in companies that have made an explicit commitment to sustainability. It searches out companies that use ecological principles in product design, for example, or that are developing cleaner energy technologies. Portfolio 21 is also active on community issues relevant to its Oregon-based home turf.

Michael Kramer, M.Ed., AIF
Natural Investment Services
Keauhou, Hawaii
The founder and former executive director of Youth Ecology Corps and Permaculture Drylands Institute, Michael Kramer is now Hawaii's only exclusive SRI adviser. He is part of Natural Investment Services (NIS), a national SRI firm that also has offices in California and Colorado. Its principals are Jack and Hal Brill, a father and son team. NIS has $50 million assets under management, with an additional $300 million co-managed. With five years' experience in SRI, Kramer currently has 30 clients and $6 million under management, and has recently begun helping co-manage the $300 million, which is a family enterprise and endowment account.

Richard and Claudia, both 41
Income: $100,000
Expenses: $80,000
Assets: Total $1,200,000 ($670,000 House; $400,000 Inheritance; $52,000 Cars; $78,000 Furniture)
Liabilities: Total $625,000 ($600,000 Mortgage; $25,000 Loans)

Kramer prepared a retirement plan for "Richard" and "Claudia," two working professionals, both 41, with two small children, who have chosen to live on the beautiful island of Hawaii. Their household income is $100,000. Both intend to retire at 65, but would prefer to do so earlier. They are compassionate former AmeriCorps volunteers who now volunteer at the local homeless shelter and do river restoration work. They read Utne Magazine, do yoga every week, eat organic food, have renewable energy in their home, and take eco-tours with the Nature Conservancy.

The family owns a home valued at $750,000 with $600,000 remaining on the mortgage. Their investment portfolio consists of a $400,000 inheritance plus their own monthly contributions of $1,500. The portfolio is designed primarily for retirement, but there will be college expenses for both children in 12 years. Because of this, they want some of their portfolio invested conservatively for tuition and expenses, though they are comfortable taking significant risks for the rest of the portfolio, given their time horizon of 20-plus years.

Richard and Claudia want their investments to be socially and environmentally conscious, and they have a strong interest in renewable energy. They're nervous about the volatility of the stock market, so they're interested in alternative investments to complement socially responsible stocks and bonds. They like knowing some of their money is directly helping people improve their lives, and they want to make corporations more accountable. Kramer made investment choices using two criteria: financial performance and social impact. For their $400,000 inheritance, he recommended diversification across asset classes with a special focus on energy. His target allocation was 69 percent in equity funds (including 13 percent international exposure), 26 percent in bond funds, and 5 percent in community investing.

For their bond portfolio, Kramer suggested Calvert Social Bond and the Community Reinvestment Act Fund as intermediate bond funds. Among high-yield bond funds, he chose Pax High Yield. And for international, he chose American Century International Bond Fund.

Among balanced funds, Kramer chose Parnassus Equity-Income and Pax World Balanced. As an index fund, he picked Domini Social Equity Index. For large-cap funds, he chose Calvert Large Cap Growth, Women's Equity, Pax World Growth, and Citizens Core Growth. For small-cap, his selection was Winslow Green Growth.

Among international SRI funds, Kramer chose Calvert International Equity and Portfolio 21. He also added sector funds: Flex Total Return Utilities, Wilderhill Clean Energy Index, and Clean Power Income Fund. With community investments, he chose Calvert Community Investment Notes, which permit diversification among a variety of community investing options.

G. Benjamin Bingham
Legg Mason
West Chester, Penn.
Educated at Yale and Emerson College in England, Ben Bingham was an educator and entrepreneur before turning to wealth management five years ago. He is an SRI specialist within Legg Mason, presently managing approximately $31 million with 60 families and institutions, including his own extended family's assets. Nine out of ten of Bingham's clients use an SRI strategy. He recently sat the board exams for the Certified Financial Planner designation. Living outside of Philadelphia, he serves on the board of the Nature Institute, and advises Economists for Peace and Security and the Triskeles Foundation. He is founder of The Circle of Entrepreneurs, a network of monthly gatherings for sustainable businesses, which meets in West Chester, Philadelphia, Princeton, and Baltimore.

Eric and Pam, 55 and 50
Income: $80,000
Expenses: $80,000
Assets: Total $780,000 ($330,000 House; $450,000 IRA)
Liabilities: $330,000 Mortgage

Bingham prepared a retiremennt plan for "Eric" and "Pam," a church-going couple with two teenage boys who are questioning the world as we know it, and Eric and Pam are starting to question too. Eric's IRA was rolled over from a 401(k) when corporate stress got to his heart and he joined his wife's consulting business, but the business only nets $80,000 per year. After ten years, the couple's house is still owned by the bank. Any potential inheritance from parents is being used up with eldercare costs. Eric has done well in stocks, but he wants some help going forward. He and Pam prefer socially responsible investing, as long as the numbers add up.

Assuming the $450,000 IRA grows tax-free for ten years -- at 9 percent with inflation of 4 percent -- the fund would amount only to the equivalent of $719,000 in purchasing power terms, when Eric is 65. Since people live on average ten years longer than they predict, the two should aim at 25 years of retirement, to age 90. That means $719,000 would create income that's the equivalent of $50,000 in today's dollars. But they need $80,000. Eric and Pam asked: How could they take a chance with SRI when their future was on the line?

Bingham told them that SRI investing has to be based on the same solid management practiced by good managers for centuries. And that's possible. The Calvert family of funds, for example, was ranked No. 4 by Barron's a few years ago, and over five years has delivered total returns of 21.6 percent, compared to peers at 16.4 percent. Ariel has seen 10-year average returns of 15.01 percent, 5 points above the S&P 500.

Eric and Pam decided to look for the best fund managers in six asset classes -- including firms such as Calvert, Pax World, Parnassus, and Ariel -- for at least 50 percent of their portfolio. But they asked Bingham: What if their funds matched market performance, and the market failed to return 9 percent?

Eric felt that with the diversification of mutual funds, they could risk 30 percent of their portfolio in individual stocks with a low correlation to the market and greater growth potential. Bingham showed him Rocky Mountain Chocolate Factory, Hanson Natural Soda, and Chiquita, which all grew over 100 percent in the last year. In the recycling field, they looked at Schnitzer Steel and Interface. In alternative energy -- too risky for just one stock -- Eric and Pam will choose between Claymore's Renewable and Alternative Energy Fund or Powershares Wilderhill Clean Energy Fund.

To hedge against currency, interest rate, and inflation risk, Bingham looked for treasuries with inflation protection, and high-yielding municipal and international bond funds. Fixed income made up 20 percent of the portfolio. For the 30 percent allocated to international, Pam and Eric asked for an unscreened Exchange Traded Fund invested in India (The India Fund), since there is no emerging-market SRI fund.

In retirement planning, a rule of thumb is to multiply today's cost of living by 16. That's the sum needed to maintain your current lifestyle. To generate $80,000, Pam and Eric must aim for $1,280,000. They may need to save an additional $14,000 per year. The tough choice: Pam's business net must grow, or Eric must return to professional work to generate the extra income.

Gregory Wendt, CFP
Enright Premier Wealth Advisors, Inc.
Los Angeles, Calif.
A gourmet cook who also pursues yoga, meditation, and surfing, Gregory Wendt is one of five principals with the Los Angeles firm Enright Premier Wealth Advisors, which manages over $300 million for clients. Over 80 percent of Wendt's clients utilize SRI. Wendt has been a financial adviser since 1991 and has been SRI-focused since 1998. He's lived in Santa Monica for 22 years and donates a good deal of time to social justice and environmental groups. He volunteers with the St. Joseph Center Venice (a homeless assistance group), advises members of Sierra Club and Greenpeace, and is involved with groups such as Bioneers, Earthday Los Angeles, and the Coalition for Clean Air.

Sarah and Joan, 51 and 52
Income: $200,000
Expenses: $100,000
Assets: Total $2,000,000 ($750,000 House; $600,000 IRA; $400,000 Investments; $250,000 Rental property)
Liabilities: $250,000 Mortgage

Wendt share a retirement plan he prepared for "Sarah" and "Joan," a lesbian couple -- both professionals -- with a combined income of $200,000 per year. The two were not particularly radical in college, though now they are members of Amnesty International, the Sierra Club, the National Resources Defense Council, and MoveOn.org. Sarah and Joan want to work 15 more years and live on $150,000 total income (spending just $100,000). They have $1 million in investable net worth, with $600,000 in IRA accounts and the rest in miscellaneous investments. Real estate assets include a home worth $750,000 with a $250,000 mortgage, and rental property worth $250,000. They may want to purchase additional real estate in the next five years, with a $100,000 down payment and $100,000 in improvements, with money coming from their investing accounts.

Sarah and Joan's goal is to grow their assets to $3 million, so they can live on 5 percent income (a prudent rule of thumb), which would gross them $150,000 annually. That way they would not need to draw down principal and could leave the entire estate (real estate and accounts) to the charities they love so much -- in particular, Amnesty International, based on their own experiences while traveling as students in Europe, Asia, and Africa.

The couple gravitated to SRI because of their concern for the environment and their own experiences of workplace discrimination based on sexual orientation.

With their $1 million investable assets, Wendt recommended they steer $200,000 toward a three-year Calvert Community Investment Note, so the money would be available in three years to create a green apartment building as an investment property.

The remaining $800,000 would be put into a blend of bonds and stocks: 40 percent bonds and 60 percent stocks, to match their profile as moderately conservative investors. Wendt determined that mutual funds were best, because most of the money was in retirement accounts, and the tax efficiency of separate account management was not necessary.

For fixed income choices, Wendt recommended a 50/50 split between CRA Qualified Investment Fund and Pax World High Yield.

For equity, he recommended that 55 percent of the stock money be split between two large-cap SRI funds, Calvert Social Investment Equity and Domini Social Equity. Twenty percent of equity funds would be split between two small-cap SRI funds, Ariel Fund and Winslow Green Growth. Another 20 percent of equity dollars would be split between two global/international SRI funds, Calvert World Values and Portfolio 21.

Because Sarah and Joan have a particular interest in clean energy, Wendt recommended 5 percent of the stock money go into Powershares Wilderhill Clean Energy Portfolio, even though it is highly volatile. The two were willing to take the extra risk, considering the diversification of their other accounts.

The couple reviewed the social screening profiles of each fund, and noticed they included some companies they weren't comfortable with. This was acceptable to them, primarily because the fund companies were engaged in shareholder activism. Sarah and Joan were excited about the impact their money could have in making good companies even better.

Charles Sandmel, CFP AIF
First Affirmative Financial Network
Brookline, Mass.
A social activist since his teens, Charles Sandmel became interested in socially responsible investing "the day my broker called to tell me he'd bought me Philip Morris, which was the week I had quit smoking," he recalls. "That's when the light went on." His career in finance dates to 1971, and he's been in private practice as a representative of First Affirmative Financial Network (FAFN) since 1998. Sandmel has 30 clients, with $6 million in assets under management. Virtually all assets are socially invested. He also sub-manages $19 million in bond portfolios for other FAFN representatives. "Bonds enable us to get at causes like low-income housing and micro credit in a more effective manner than stocks," Sandmel said. And they're useful for all investors. "The news that moves stocks downward often moves bonds upward, making bonds a useful tool for reducing volatility."

Jane, 62
Income: $58,000
Expenses: $50,700
Assets: Total $987,000 ($470,000 House; $120,000 SEP-IRA; $280,000 TIAA-CREF; $61,000 Annuity; $36,000 Mutual funds; $20,000 CDs)
Liabilities: Total $288,500 ($270,000 Mortgage; $16,000 Car loan; $2,500 Credit cards)

Sandmel prepared a retirement plan for "Jane," 62, a Jungian analyst in private practice after a career in education. She became an anti-war activist after her fiancé was killed by friendly fire in Vietnam, and now is a student of Zen Buddhism. She participates in a Zen social ministry group and volunteers at a food pantry. Jane got interested in SRI when she served on the board of the Public Employees' Credit Union.

Jane enjoys her work and intends to continue more or less full time until age 70, when she will slowly wind down her practice and ease into retirement. She is single and has no dependents. She has considered and rejected long-term care insurance. Jane's mother recently died, leaving her about $200,000, now in cash. Her other retirement assets consist of a Social Security benefit, $250,000 in TIAA Traditional, $20,000 in mutual funds, plus $20,000 in a SEPIRA invested in an S&P 500 index fund. A SEP-IRA is a Simplified Employment Plan IRA, designed for self-employed people. It permits a contribution of up to $40,000 or 25 percent of compensation annually, compared to $4,000 for a traditional IRA. Jane asked Sandmel to help her allocate her SEP-IRA, TIAA account, and inherited assets to meet the following goals:

• Replace an income of $40,000 per year (adjusted for inflation) beginning at age 70 and increasing by 3 percent per year through age 95.
• Invest according to her social criteria: supporting green business and micro finance, and avoiding sweatshop-made goods, tobacco, nuclear weapons, and gun manufacturers.
• Create a portfolio that "I don't have to worry about," which Sandmel refined to mean a portfolio with maximum probable loss below 10 percent.

The plan assumed Jane would add $7,000 per year to the SEPIRA in 2006, increasing that 3 percent a year until age 70. She would begin taking Social Security at age 66, adding that income to her taxable investments through age 70. The TIAA annuity would generate $25,000 per year at age 65, increasing 3 percent per year. Beginning at age 71, she would take the minimum required distribution from her SEP-IRA. We assumed annual returns of 7 percent in the SEP-IRA and 5 percent (reflecting taxes) in the taxable account.

Under these assumptions, the retirement resources would only support income beginning at $38,000 (inflated). Jane considered this too frugal, so they went back to the drawing board. The TIAA Traditional annuity guarantees a 2.5 percent rate of return, so it was treated as an asset with zero downside. This permitted a greater level of risk in the other assets, which increased assumed rates of return to 8 percent and 6 percent, raising income to $40,000. For Jane's $200,000 inheritance, Sandmel recommended First Affirmative's "Balanced Growth" portfolio, which targets an 8 percent return. Balanced Growth is a mixture of SRI mutual funds, including Calvert World Values, Portfolio 21, Domini Social Bond Fund, Domini Social Equity, and 12 to 16 others.

By Graham Sinclair (Grahams@kld.com), a Product Manager: SRI Research at KLD Research & Analytics in Boston.

Community Investing Options

Investors wanting direct impact through their investments should consider community investing, which uses investor loans to make capital available to those often denied access. For your Individual Retirement Account (IRA), there are a limited number of diversified community investment options available, among them the CRA Qualified Investment Fund and Calvert Community Investment Notes. The CRA Qualified Investment Fund is a mutual fund with $635 million in assets, managed by CRA Fund Advisors. It invests in debt securities issued for community development, and thus qualified under the Community Reinvestment Act of 1977. Average credit quality of the fund's securities is AAA, which is high.

Calvert Community Investment Notes, offered by the Calvert Foundation, are not structured as a mutual fund, nor are they FDIC insured. The assets are invested directly in community development financial institutions (CDFIs), which focus on affordable housing, micro credit, small business loans, and community development. The investor can choose the geographic region where the investment is put to work, and earns returns slightly below market, generally 2 percent.

A unique feature is that these notes quantify social returns in addition to financial returns. For example, an investment of $10,000 at 2 percent for three years would earn $600 in interest and provide financing for "37 micro-enterprises creating 50 jobs abroad, or two affordable housing units for low-income families." See the Community Investing Center (http://www.communityinvest.org/index.cfm).

By Graham Sinclair and Lisa Laird, CFA

What's In Your 401(k)?

In 2001, For Motor Co.s' 401(K) retirement plan was one of the first major plans to actively include social investing options, sending an important signal as the nation's ninth largest defined contribution plan, with $17 billion in assets. The United Universalist retirement plan includes eight SRI funds. Firms like HP and Intel have also added SRI to their 401(k) options. And the Domini Social Equity Fund is available on several large retirement plan distribution programs -- including Goldman Sachs & Co, American General Funds Alliance, Lincoln Life and Annuity, and Prudential Securities' PruChoice Program.

Even with this progress, employees who ask their human resource department about SRI options in their 401(k) plan are likely to encounter blank stares or dead air. KLD Research & Analytics and Boston College surveyed S&P 500 companies in August 2005, finding that among those with retirement plans, only 3 percent offered an SRI option.

Still, getting your plan to offer an SRI option may be as simple as asking. One person who did so was Shandor Szalay, an engineer in Philadelphia. Within six months of his proposal the organization added Domini Social Equity.

David Stangis, director of corporate responsibility at Intel Corp., recalled, "When Ford installed Domini in their plan, I was asked several times that year if we had a social investing choice in our 401(k) plan," Stangis said. The cause was taken up by Stangis and later the internal employee sustainability network. Still, it took three years before the wheels turned, and in April 2004 Intel added two Calvert funds -- one equity, one bond -- when it moved from 14 to 40 investment options.

HP has had a social investing option since 1998, as one of 37 options in its retirement plan. David Lear, v.p of corporate, social and environmental responsibility, said "for HP it is a natural fit to our corporate citizenship approach."

A socially responsible approach to retirement savings is now easier for companies, since the August 2005 launch of the Social(k) Retirement Plan platform by ExpertPlan. This new platform offers over 35 SRI funds from nine fund families, including Calvert, Parnassus, Citizens, Pax World, Sierra Club, and others, in addition to 500 traditional funds.

This article was published in Business Ethics Magazine.