Tax Planning

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

Upcoming Event

Sep 10

Conference

Denver Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in six 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

INTV

Forecasting a revolution in financial planning tools

Special projects editor Liz Skinner and reporter Ryan W. Neal discuss the technology behind financial planning software and how it is helping spur change in the adviser and investor experience.

Latest news & opinion

Finra suspends former star LPL rep who borrowed client cash

Regulator says James E. 'Jeb' Bashaw borrowed $200,000 from a client in 2013 without telling LPL.

Higher tax bills following reform surprise clients

Lower withholding and the loss of state and local deductions throw many for loop.

Centerbridge said to be in talks to buy Advisor Group

Advisor Group's independent broker-dealer network in the U.S. has more than 7,000 advisers.

The drawback of Richard Thaler's 401(k)-Social Security idea? Social Security itself

Observers think Congress would need to address Social Security's funding levels and offer enhanced protections for the concept to work

Social Security funding outlook improves slightly

Retirement reserves extended one year; disability fund by 20 years

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