WA Changes Socially Responsible Investment Option for DCP and Plan 3 Members

A huge change just occurred for Socially Responsible Investors participating in WA’s DCP and Plan 3 Retirement Systems. And if you haven’t made any changes to that account since the fund change went into effect (April 2024), you may suddenly be invested in a far more aggressive portfolio than you were before.

What is the change and who does it impact? 

Prior to April 2024, the Socially Responsible Investment (SRI) Option for DCP, Plan 3, and JRA Members was the Boston Trust Walden Balanced Fund. A 70% Equity, 30% Fixed Income Blended Fund that would be a relatively suitable “whole portfolio” investment for the average investor. 

As of April 2024, the approximately $350 million dollars that WA state investors had in that fund are now invested in the Alliance Bernstein Global Thematic Fund – which is a 100% Equity fund. That means the stock-bond blend you may have been holding in your portfolio is now 100% stocks (about 60% U.S. stocks, and 40% international stocks).

So, if your entire DCP or Plan 3 account was invested in the SRI option, and you haven’t changed it at all, your portfolio has just taken on 30% more equity, increasing both your opportunity for long-term growth, but also substantially increasing your risk. This may be perfectly okay if you are 30 years old with a high level of risk tolerance, but if you’re in or nearing retirement and/or simply have a lower risk tolerance related to your investments, this change has a substantial impact. 

This is particularly concerning considering that a much higher percentage of SRI fund investors in the WA State plan are over the age of 50 years old, and a much lower percentage are younger investors. (Source: DRS Record Keeper Data)

What’s the rationale behind it?

The Washington State Investment Board (WSIB) started working on this analysis in 2021 and announced this choice along with the rationale behind it about a year ago. You can see the highlights of that recommendation here.

The rationale behind moving to a more aggressive equity-only fund was essentially that the fund was most commonly being used as a portion of an investor’s overall account rather than as a single investment designed to “do everything.”

According to their report, once it was determined that an equity-only fund would be a suitable replacement for the current fund, the WSIB screened investment fund options by looking for a fund that had stated, intentional objective alignment with the United Nations 17 Sustainable Development Goals (SDG’s). 

The other main difference between the two funds was in overall strategy – with the new fund claiming a predominantly active investment strategy in SRI causes/themes, and the Walden fund being more of an exclusionary-only approach, designed to keep investors out of certain types of investments. 

Is the new fund more socially responsible or a better investment? 

On paper, it all sounds great:

  • more proactive investment (active vs exclusionary-only) 
  • a wider range of SRI targets based on the UN’s SDGs
  • more opportunity for investment growth due to a more aggressive investment strategy

But does the new fund really pass muster? 

Realistically, most SRI funds fall well short of what SRI investors are asking of them and what they are claiming to do, and both the previous fund and the new fund are no exception. 

But in an independent comparison by the non-profit As You Sow, while the two funds scored similarly on fossil fuel exposure, prison industrial complex exposure, and civilian firearms exposure, the new fund actually scored worse on military grade weapons exposure, and substantially worse on gender equality and deforestation than the old fund did. So, while the stated objectives of the new fund as they relate to the 17 SDGs is certainly admirable, a closer look at whether they’re doing a better job meeting those objectives reveals something less impressive. 

Additionally, although the average annual return over time of the new fund is higher than the old fund (which we would naturally expect given its more aggressive investment approach), its measure of risk-adjusted performance is not nearly as good as the previous fund. So, I would generally say no, I don’t think this is as shiny of an object as WSIB is trying to convince us that it is. But as an investor in these accounts, it is, now, the only SRI option that you have. And it is certainly better screened than any of the other funds within the state’s investment offerings.

How does it impact investors in the socially responsible fund? 

Possibly a lot, and possibly not much at all. It really depends on what percentage of your overall current and ongoing investments are in the socially responsible fund.

At its most extreme (100% of your investments in this fund) your portfolio just increased its stock exposure by 30%, which is not insubstantial. But if you only have 10% of your current and ongoing investments in this fund, your stock exposure only increased by 3%, which is likely not that big of a deal.

What should I do about it?

You really have two main options for making sure your investments are invested the way you intended them:

If you want your old allocation back

If maintaining the pre-April 2024 stock-bond ratio is important to you, then you need to make an adjustment in your overall investments in order to reset that ratio. 

Remember, before this change, if you were invested in this fund, you had some money invested in stocks and some money invested in bonds. The easiest way to re-implement this is to just offset the new SRI fund with the Washington State Bond Fund using the following formula: 

Old Percentage SRI Fund * .30 = New Percentage Washington State Bond Fund

Old Percentage SRI Fund * .70 = New Percentage SRI Fund

If formulas are not your thing – here’s an example to show you how it works: 

Let’s say, in your DCP account, your current investments are 55% in the SRI fund, and your future ongoing investments are set to go 50% into the SRI fund, and 50% into other plan investments. 

To make your current investment allocation reflect what you had it at before this change: 

55% * .30 = 16.5% to Washington State Bond Fund 

55% * .70 = 38.5% to SRI Fund

To make your future investment allocation reflect what you had it at before this change: 

50% * .30 = 15% to Washington State Bond Fund 

50% * .70 = 35% to SRI Fund

Without making this adjustment, in the example above, you’d end up with 15-16% more ongoing stock exposure than you had before they made this change.

If you’re fine with increased stock exposure

It may be that the increased market volatility and risk is fine with you, and that you’re happy with the new, more aggressive investment strategy. If that’s the case, no changes will be needed.  However, considering the overall age demographic of most people currently utilizing the SRI option, I think it’s important to make sure your investment strategy stays well aligned with your risk tolerance and financial planning goals, and this fund change may have substantially impacted that strategy if you haven’t actively made any adjustments to your investments.

If you’re not sure whether your investment strategy is aligned with your risk tolerance and financial planning goals, feel free to schedule a free 30-min call here, and we’ll see if we can help point you in the right direction.