Discover college savings options for socially responsible investing
When Krista Pfeiffer and her husband, Daryn Edwards, decided to open college savings plans for their son and daughter in their home state of Pennsylvania, they were happy to see that they could choose a "socially responsible" investment, or a fund of stocks screened for social and environmental criteria.
Pfeiffer, who works for an education reform nonprofit, said the Vanguard Social Index aligned with their broader life philosophy. They volunteer, donate to charity and try to make environmentally sound choices. When they invest – whether for retirement or college – they try to do so in a socially responsible manner.
"We, overall, try to live a life that is a reflection of our principles," says the 41-year-old Philadelphia mom. "Our main goal in life is not at all about making the most amount of money possible. It's about living lives that we feel good about."
Pennsylvania is one of at least eight states – and the District of Columbia – that offer a socially responsible fund within their suite of 529 plan options. A 529 college savings plan offers federal and sometimes state tax benefits for college savings. College savers can invest in any state's 529 plan, but might only receive state tax benefits for investing in a plan in their home state.
What makes the funds socially responsible depends on the manager. Many will use a third-party company to screen for businesses that meet environmental, social and governance standards within an index of stocks. Some offer a "negative screen," which means they screen out certain companies, such as those in the tobacco or nuclear power industries, while others offer a "positive screen," which rewards "best in class" companies, says Jared Peifer, an assistant professor at CUNY—Baruch College who studies socially responsible investing.
Compared with a traditional index fund, socially responsible funds require extra work to evaluate the companies, and that can lead to higher fees, says Matt Hougan, CEO of ETF.com, which offers information and analysis about exchange-traded funds.
The fees can vary. Pennsylvania has worked to lower fees on the Vanguard Social Index Portfolio from 0.75 percent to 0.5 percent, says Doug Rohanna, deputy state treasurer for external affairs.
The TIAA-CREF Social Choice Equity Fund, which is a mutual fund made up of stocks and is offered in five states, averages only slightly higher fees than other TIAA-CREF single-fund portfolios. The Social Choice Equity fund fees range from around 0.26 to 0.4 percent, depending on the state.
Calvert Investments, which manages the DC College Savings Plan and touts it as the only 529 plan in the country to offer "a full range of sustainable and responsible investments," has an expense ratio of around 1.3 percent on many of its funds.
"If you're investing for 10, 15 or 20 years, a percent a year really adds up," Hougan says. "It can make the difference between, in this case, having enough money for college or having to take on significant student debt."
For instance, a 1 percent fee on a 529 plan that grows to $100,000 will cost $1,000 per year.
"It's great on principle that people are thinking about this," Hougan says. "Either choice they make is fine. You just have to make the one that aligns best with your values and also pays for your kids' college. You've got to do both."
Pfeiffer says she recognizes she may be paying a premium for her plan, but she doesn't mind sacrificing a little bit of revenue for a socially responsible investment.
"I want to make sure I'm supporting, to the biggest extent possible, programs I feel good about," she says.
Jeremy Thiessen, senior director in TIAA-CREF Tuition Financing, says the idea of investing in companies that "do good" isn't just altruistic – it has a practical side, too.
"There is also belief among portfolio managers who offer these, as well as participants who invest in them, the simple idea that companies, large companies, who adhere to environmental, social and governance rules and have these things in mind, will fare better long term," he says.
In addition to the Vanguard Social Index Portfolio offered in Pennsylvania, prospective 529 plan account holders can look to the TIAA-CREF Social Choice Equity Fund offered by 529 plans in California, Connecticut, Oregon, Texas and Wisconsin. Investors looking to choose a socially responsible fund can also investigate nine socially-responsible plans offered by Calvert Investments through the DC College Savings Plan and the Calvert Equity 529 Portfolio, an advisor-sold plan in Illinois. The Parnassus Socially Targeted Investment Portfolio is available in Virginia.
Trying to save for college? Get tips and more in the U.S. News College Savings 101 center.
Copyright 2015 U.S. News & World Report
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