Does Your Retirement Portfolio Match Your Values? Plus: Apple’s New MacBook Neo

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16:07Sean Pyles:usually are invested in some of the most common stocks like Tesla. The idea of giving Elon Musk an ounce of my money makes me physically ill, but being charged with determining all the stocks to invest in for my retirement fund feels above my scope. Any advice? Hope this makes sense, and thanks for all that y 'all do. What a conundrum.

16:26Elizabeth Ayoola:Now to help us answer this conundrum, we're joined by investing writer, Bella Avila. Welcome back to Smart Money, Bella. Thanks for having me. OK, so now let's set the stage for the conversation, which I think is a pretty intriguing one. Now, our listeners invested in a target date fund in their company's retirement account. Can you, Bella, describe how these funds are structured and how many companies might be in a single fund?

16:51Rick VanderKnyff:Yeah, so you can think of a target date fund kind of as like a mega mutual fund that adjusts its investments the closer you get to retirement. So when you're younger, a bigger portion might be riskier investments like stocks since you have some time to weather out any downturns in the market. And then as you get older, it'll shift towards safer investments like bonds. And I say it's a mega mutual fund because a target date fund is a mutual fund made up of other mutual funds. So as far as how many companies it might invest in, the answer is usually thousands.

17:25Sean Pyles:Knowing which companies are in your retirement account fund can be a little daunting because, Bella, as you said, there could be thousands of them. And for average investors, this can be pretty challenging task to even start. So do you have any tips for how people could maybe easily understand which companies make up the fund they're invested in?

17:44Rick VanderKnyff:Well, this probably isn't the answer anyone wants to hear, but easy just isn't really a word I would associate with digging into which companies make up your target date fund. As much as I would love to be able to really quickly get a list of every company I'm invested in and then see how much of my fund is made up of each. They really just don't make it that easy on us. Every plan won't be the same, but I'll kind of run you through how I found this information myself. First, I logged into my Fidelity account to verify which fund I was invested in, which is the Vanguard 2065 target date fund. And then I just popped the fund name into Google and clicked on the related Vanguard page about my fund.

18:21Rick VanderKnyff:And like I said, target date funds are basically mega mutual funds. So that page just told me which four funds made up my target date fund. And then I had to open the Vanguard pages associated with each of those funds and then just keep scrolling until I found the list of companies each one invested in.

18:36Sean Pyles:Yeah, it's kind of like Russian nesting dolls of different funds. Like you have your targeted fund and then there's a fund within the fund and then all the companies within that fund. So it can be really confusing. And I'll get into this more later. But when I was researching my own funds ahead of this conversation, it took me a while to do, and I do this for a living. So we understand why this might not be an easy thing for them to take on. So our listener did call out Tesla in her question to us, but there are a number of companies and social issues that people might not want to support through their retirement funds.

19:06Sean Pyles:For me personally, I've been really concerned about my retirement funds being used to fund private prisons, particularly those that are used to detain immigrants. There have been a lot of human rights abuses documented at these facilities, including those documented by the ACLU. So while we've recently seen some changes to how ICE raids are being conducted, where and how people are being held hasn't changed. And a lot of people might not want to be indirectly funding or growing their retirement nest egg on these conditions. So that said, knowing whether your fund does invest in private prison companies can be really hard, as we just kind of outlined.

19:43Sean Pyles:We might see this really long list of companies in our target date fund and have no idea what the companies actually do. So Bella, what are your thoughts around how we can determine whether the companies that make up our funds align with our values?

19:56Rick VanderKnyff:Well, this is kind of hard to answer because like I mentioned, a target date fund can hold tens of thousands of investments. So researching each company individually would just take a ton of time. Although what I'm about to say is a little bit ironic since AI companies are among those I personally like to avoid investing in. I think a good use case for AI would be giving it an idea of the types of companies you'd like to avoid investing in and then asking which companies in your fund don't align with your values. I actually tested this approach and was pretty happy with the results that I got.

20:28Elizabeth Ayoola:I'm with you, Bella. I have been trying to be more mindful about how I use AI, thinking about all the environmental impacts and the negative effects of AI. But I think this might be an exception to the rule because you're trying to do a good and doing a bad. So can you tell us more about how you use AI to help you in this case?

20:45Rick VanderKnyff:Yeah, absolutely. I used Google Gemini, but I'm sure most AIs will give pretty similar results. I told it which Vanguard target date fund I was invested in, which funds it houses, and asked it which companies I'm invested in aren't climate friendly, since that doesn't align with my values. Of course, you can tweak this however you want to make it work for you. But it flagged which funds had the highest fossil fuel exposure, which companies within those funds were the worst offenders. And then it gave me some useful insights about what my options are if I want to avoid investing in these companies.

21:17Rick VanderKnyff:And you'll definitely want to fact check it because AI can hallucinate sometimes. But I personally found this process to be really helpful and efficient. And I think it beat doing all the research on my own.

21:26Elizabeth Ayoola:It sounds like there's no perfection here, right? Right. But you can get closer to maybe having a fund that aligns with your values since I said there's thousands and thousands of companies to look through. But if someone discovers that they are invested in a company that they disagree with, what are their options in this case? It's not like they can just opt out of one or two companies in their target fund, right?

21:46Rick VanderKnyff:Yeah, that's right. The big caveat to doing all of this research is that unfortunately, it might not really amount to much. It can definitely be good to know which companies you're invested in, and then you can keep that information in your back pocket to know what to avoid when you're investing somewhere else. But you don't usually have the choice to opt out of these companies when you're in a target date fund. If you feel really strongly about not investing in these companies, you might have the option to pick your own investments through a self-directed brokerage account within your 401k. For instance, Fidelity has something called BrokerageLink.

22:20Rick VanderKnyff:if your employer offers it, it would allow you to take advantage of tax benefits and then any employer match that you get on contributions to a 401k, but then you'll have more freedom over what you're invested in. I do really want to stress though how difficult it can be to achieve a well-diversified portfolio if you're handpicking your stocks yourself. It's really not for most people. I'm no financial advisor, but what I would lean toward myself is investing in a target date fund and then maybe looking somewhere else to invest based on your values.

22:50Sean Pyles:Yeah, this is why IRAs can be really helpful for people who want to be more intentional with where they're putting their money for retirement, right?

22:57Rick VanderKnyff:Yeah, an IRA gives you more flexibility when it comes to choosing investments and it's tax advantage too. You might also look into a strategy called direct indexing, which just means buying individual stocks that a fund is made up of instead of actually investing in the fund itself. and this would give you some freedom to leave out ones that you don't align with. And this can take a lot of research and time, but it's definitely possible to create a diversified portfolio that mimics maybe like the S &P 500, but leaves out certain companies. And you can also apply this direct indexing strategy to a regular taxable brokerage account if you want.

23:34Rick VanderKnyff:You'll just want to choose your broker pretty carefully because some of them require high account minimums to do this. And then the last option I'll throw out there for investing based on your values is a robo-advisor. I know Betterment is one that has climate impact and social impact funds that would offer you some diversification that you might not get if you were handpicking stocks on your own. That's just one example, but a lot of robo-advisors have pretty similar portfolio options. Yeah.

24:00Sean Pyles:And if people are going to go the route of maybe choosing all of their own investments within a retirement account, I would recommend consulting with a financial advisor, a certified financial planner, ideally, because they can help you understand all these companies and what might be a good balance for your goals and your time horizon.

24:15Rick VanderKnyff:Yeah, I definitely echo that. Okay.

24:17Sean Pyles:So as I was preparing for this recording, I really went down a rabbit hole that was inspired by this listener because, you know, I also don't want to feel physically ill about the investments in my retirement account. And I looked into what I've been investing in. I'm investing in Vanguard's 2055 target date fund. And I found that a large percentage of the funds I was invested in had companies within them, again, that Russian nesting doll thing, that are associated with the private prison industry. And this was according to a tool that I use called Prison Free Funds, which you can access at prisonfreefunds.org.

24:50Sean Pyles:The tool at that website is really helpful. I found that did a lot of the heavy lifting for me in terms of determining whether companies in my retirement account do align with my values. So looking within the Vanguard Total Stock Market Index Fund, which makes up a little over half of the fund within my target date fund, the amount going to private prisons is less than 0.01%. So that helped me feel a little bit better about the amount I was investing in private prisons. And so also does understanding the nature of this fund too, which you might gather from the name Vanguard Total Stock Market Index Fund is designed to give me exposure to the entire U.S.

25:27Sean Pyles:equity market, which of course includes private prison companies.

25:30Rick VanderKnyff:Right. Investing in like a broad index fund like that can seem really great because you're getting a lot of good diversification with it. But the one downside to investing in a lot of companies is that it also increases the likelihood that you won't like all those companies.

25:44Sean Pyles:Exactly. That said, I'm not really wild about any amount of my money going into private prisons, even if it's less than 1 % of my investments. Like you said, Bella, we use Fidelity for our retirement accounts at NerdWallet. So I logged in and I checked out how I can change my investments. And there are options to change my current investments and also change my future investments. So if people want to truly and entirely divest from companies they don't agree with, and thus these target date funds, you need to change both, really. So I looked into my investment options that I have available, and I found that there wasn't one that aligned with my values at all, unfortunately.

26:20Rick VanderKnyff:Yeah, I can really relate to your disappointment there. What I'm currently invested in and then a lot of the other options we have just don't really reflect my beliefs. I think it's really hard to find a pre-made fund anywhere that perfectly aligns with your values. But then when your options are limited even further through a workplace retirement fund, it kind of just feels like an impossible challenge.

26:42Elizabeth Ayoola:Well, where do you guys find the balance then? Because we want to invest for the future. We want to have enough for retirement. We want to create financial stability, but we also want to be true to our values. But it seems like there isn't an all or nothing option.

26:54Sean Pyles:Right. I looked into the brokerage link option that Bella mentioned earlier, where I can choose all of the investments within my retirement account or for my retirement investments. And even though I am a certified financial planner, I didn't feel equipped to do that on my own right now. I would love to get to that place as a goal. But frankly, I have a lot of other things pulling on my time and attention. And I know it's going to take hours and hours to do that just the right way. And I would love to consult with another CFP too, just to check my work. And that underscores as well how using something like BrokerageLink isn't a realistic option for the average investor, especially if they want to get to a secure place with their retirement investments and have a diversified portfolio.

27:37Sean Pyles:So I'm in this sort of in-between place that you just mentioned, Elizabeth, where I'm trying to square the circle of my conscience so I can live my values even if my retirement investments don't fully reflect my values. So there isn't a perfect answer. I feel like there's this line thrown around that there's no ethical consumption in capitalism and the same goes for investing, I suppose. The answer to me that helps me sleep at night is just investing, contributing, donating more to those who are directly affected by the companies that I don't really align with and that I view as causing harm in our society.

28:12Sean Pyles:So to me, that's just monthly contributions to legal defense funds and organizations that are helping those who are being jailed in violation of their due process rights.

28:21Elizabeth Ayoola:I'm in a similar boat, Sean. I think just with everything, as a girl who studied social sciences and who was constantly outraged at the world throughout her 20s, I think my point of peace was realizing I cannot solve all of the world's issues. So there's just not going to be any perfection. So it's like balancing out the damage that you're causing. So do a little recycling here, you know, consume less there, update your target date fund, you know, to the extent of your capacity. So I think it's just spreading it throughout, right?

28:48Sean Pyles:And this is where individual actions run up against systemic challenges because we can't change how the stock market is structured overnight. We're not individually going to be able to transform how our target date funds are structured, but we can do what helps us at least sleep at night a little better. Bella, I'd love to hear how you approach this too.

29:06Rick VanderKnyff:Very similar to both of you. I've tried to make peace with the fact that retirement investing just isn't perfect. Our investments might not always match our values. And then, you know, we have little control over that sometimes. But I try to focus on what I do have control over. I've talked a little bit about the different accounts that people can set up to invest based on their values. But I also want to recognize that not everyone has the extra income to stay invested in their retirement fund and then also invest somewhere else. I think there are meaningful ways you can support companies you align with just in your daily life.

29:40Rick VanderKnyff:This is definitely going to look different for everyone. But just for example, for me personally, it's doing things like buying vegetarian foods to not support the meat industry and avoiding fast fashion. And then probably the most important of all to me right now is shopping local as much as I can. You know, as someone who lives in Minneapolis, there are a lot of small businesses doing really good things right now, like donating a portion of their profits to causes I care about. So something as small as just like getting your morning coffee down the street instead of going to a big corporation can be pretty impactful.

30:13Rick VanderKnyff:I think there are a lot of ways to use your money for good outside of just investing.

30:17Elizabeth Ayoola:Yeah, that's right. I guess since we're all being softy here about giving back to the planet. Sean, if you remember, I mentioned that during my birthday, I made the gift bags for the homeless people. And because homelessness is another world issue that grates my nerves and it shouldn't exist. I was like, well, I don't have to wait until my birthday to create these gifts back. So now I have them in my trunk. And anytime I see homeless people, I just give them sanitary goods and things to help them. So there are always little ways to give back, right? That's so sweet. We can't change the world over.

30:43Elizabeth Ayoola:I love that.

30:43Sean Pyles:Just do a little bit at a time, right? That's right. And one last thing I'll throw out too is if you are really unhappy with a structure of your retirement investments at your company, you can talk with your coworkers, talk with your management and see if they might be able to change your options available. In some cases, they might be able to put together an environmental, social and governments fund that would more align with your ethics. But you won't know unless you ask and hopefully advocate for that change to happen. Well, Bella, thank you so much for coming on and talking through this kind of thorny issue with us.

31:12Sean Pyles:I know that we're not going to come to the perfect solution overnight. I think it's a gradual process and a conversation we all need to have with ourselves and with each other. And I think this is hopefully a good step for our listener, too.

31:23Rick VanderKnyff:Yeah, I really appreciate you guys having me on for this conversation.

31:26Sean Pyles:Well, that's all we have for this episode. Bella, I'm going to throw the sign off to you. Can you read us out?

31:31Rick VanderKnyff:To have the nerds answer your money questions, call or text us your questions on the nerd hotline at 901-730-6373. That's 901-730-NERD. You can also email us at podcast at nerdwallet.com.

31:48Elizabeth Ayoola:We want you to come and hang out with us next time to hear about how to choose the right credit card for your lifestyle. Follow Smart Money on your favorite podcast app that includes Spotify, Apple Podcasts, and iHeartRadio to automatically download new episodes.

32:02Sean Pyles:Here's our brief disclaimer. We are not your financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances.

32:13Elizabeth Ayoola:This episode was produced by Tess Figland, Hilary Georgie helped with editing, Nick Karisimi, and Eve Krogman help our audio and video production. and a big thank you to NerdWallet's editors for all of their help.

32:24Sean Pyles:And with that said, until next time, turn to the nerds.

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