Tax Planning

Experts highlight the tax issues every financial adviser should know

401(k) plans shouldn't jump the gun divesting firearm stocks

Jan 20, 2013 @ 12:01 am

By Darla Mercado

Plan sponsors may want to hold off if they are thinking of selling stocks of controversial companies such as firearms manufacturers, despite the fact that some public pension plans are reviewing their holdings of such stocks, some financial advisers say.

New York is the latest state to freeze such investments. The New York State Common Retirement Fund confirmed last Tuesday that the fund — which has $150.1 billion in assets — is halting its investments in publicly traded commercial-firearm manufacturers.

The move follows last Monday's call by Chicago Mayor Rahm Emanuel for five city pension funds to determine whether the fund managers hold equity or debt instruments from companies that either sell or make assault weapons. The review is the first step toward dropping the investments from the plans.

But financial advisers and attorneys who specialize in the Employee Retirement Income Security Act of 1974 warn that other employers should think twice before making similar decisions, particularly if such divestments could put a dent in a retirement plan's returns.

“From a plan standpoint, the primary purpose is to provide for the retirement benefits of the participants and beneficiaries,” said Richard K. Matta, principal at Groom Law Group. “Any other considerations have to be secondary.”

STRONG RETURNS

Indeed, companies such as firearms manufacturers Smith & Wesson Holding Corp. (SWHC) and Sturm Ruger & Co. Inc. (RGR) have had strong returns, beating the broader S&P 500.

As of Jan. 14, trailing total annualized returns for Smith & Wesson were 71.46% for the one-year period, 24.16% for the three-year period and 8.75% for the five-year period. Sturm Ruger also experienced strong total returns of 39% over one year, 72.73% over three years and 48.08% over five years.

By comparison, trailing total returns for the S&P 500 were 16.69% for the one-year period, 10.92% for the three-year period and 3.03% for the five-year period.

As a result, removing such holdings — as well as “vice” stocks — could create a damper on returns. The Vice Investor Fund (VICEX), for instance, returned 23.17% last year, 16.73% for the three-year period and 2.43% for the five-year period.

“All the work we've done on the subject suggests that if you go socially conscious, you should expect to underperform the S&P,” said Michael Francis, president of Francis Investment Counsel LLC. “That's not to say there aren't products out there that are consistently outperforming, but the overall impact has been a detractor to returns.”

Mr. Francis noted that he hasn't received any recent questions from plan sponsors about investments that are connected to the firearms industry, but typically, hospitals and other nonprofit groups are the ones that prefer to invest in a socially conscious manner.

FIDUCIARY ROLE

On Jan. 9, the California State Teachers' Retirement Systems said that it would start divesting from firearms companies that manufacture weapons that are illegal in the Golden State. Since then, several large funds have followed suit.

But employers seeking to replace their firearms stocks or other controversial holdings need to consider the rationale for the switch, such as whether the fiduciary is making a prudent call that the divestment is financially safer, Mr. Matta said.

The Labor Department requires that such alternatives chosen by fiduciaries be either equal or superior to whatever investment they replace.

Finding which investments are tied to controversial industries might not be easy, particularly when taking a closer look at the underlying stocks inside funds offered in a 401(k), said George Fraser, managing director at Retirement Benefits Group LLC.

“How do you determine the relationship that those stock companies have with the gun companies?” he asked. “You may end up down to three mutual funds.”

As a result, it may make better sense for employers to draw a line between social policy and the returns that they seek for their workers, said Marcia Wagner, managing director at The Wagner Law Group.

“An underfunded pension plan should have one goal in mind: "What assets should we invest in to diminish the underfunded status?'” she said, noting that the caveat is that plans invest in accordance with the law.

dmercado@investmentnews.com Twitter: @darla_mercado

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

May 02

Conference

Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video

Events

What's the first thing advisers should do when they get home from a conference?

After attending a financial services conference, advisers can be overwhelmed by options, choices and tools. What's the first thing they should do when they get back to their office?

Latest news & opinion

Is Fidelity competing with retirement plan advisers?

As the Boston-based mutual fund giant expands the products and services it brings to the retirement market, some financial advisers say the firm is encroaching on their turf.

Gun violence hits investment strategies, sparks political debates with advisers

Screening out weapons companies has limited downside.

Social Security underpaid 82% of dually entitled widows and widowers

Agency failed to tell survivors that they could switch to a higher retirement benefit later.

If Finra eases firm oversight of outside business activities, broker-dealers could lose revenue

Brokerage firms would no longer be able to charge reps for supervising nonaffiliated RIAs.

Galvin charges Scottrade with DOL fiduciary rule violations

Action of Massachusetts' top regulator shows states can put teeth into a rule under review by the Trump administration.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print