Question # 402: My offers a 401k plan where I contribute 6% of my pay and they match it with 6%. This is optional for employees to participate. The money gets invested into a mutual fund and some of the equities in the fund are not shariah compliant. I want to know if I can participate in the plan and only keep my principal and the employer’s principle match. Any gain I would donate to charity without the intention of reward. Under these conditions would the 401k plan be permissible to participate in. Jazakum allah khair

bismi-llahi r-raḥmani r-raḥīm,

Assalamu ‘laikum warahmatullahi wabarakatuh,

All praise and thanks are due to Allah (سبحانه و تعالى), and peace and blessings be upon His Messenger (صلى الله عليه و سلم).

Dear questioner,

First of all, we implore Allah (سبحانه و تعالى) to help us serve His cause and render our work for His sake.

Shorter Answer: 401K funds are usually invested in mutual funds, which in turn are invested in stocks and bonds. Bonds are always interest-based, while stocks may be of companies whose main business is permissible. However, sometimes, companies whose main business is permissible, may be highly depend on haraam income from other sources. Nevertheless, investing in 401K Plan usually gives one the option on how one wants to invest; hence, one needs to avoid all the prohibited categories of investment. However, if one cannot entirely avoid investment in non-permitted funds, one must play smart and select funds with the least possible forbidden content, without endangering one’s assets in the 401K. Consequently, most of the scholars have allowed participating in 401K plans under such circumstances, provide one purifies the money received by giving away in charity, an estimated amount coming from haraam sources in these funds. This give away does not count as charity but expiation (kafaarah) for receiving haraam income. The scholars have granted this concession, so that the employees do not end up losing the employer’s contribution. Furthermore, one should be aware of the existence of “Dow Jones Islamic market index” (DJIM), wherein there are several mutual funds established on the basis of Shari’ah compliant stocks that one may want to invest in for 401K. Also please refer to Question # 298: Zakat on 401(k) Retirement Plan.

Long Answer: According to Dr. Monzer Kahf, “401K funds are usually invested in mutual funds, such as Fidelity’s. Mutual funds invest in stocks and bonds. Bonds are always interest based. Stocks may be of companies whose main business is permissible such as technology and oil stocks or forbidden in Shari’ah such as banks and financial sector’s stocks. Also companies whose main business is permissible may highly depend on interest-based borrowing or interest income or may not, if they heavily depend on interest, one way or the other, they are also prohibited. The problem is that when you own a stock you are a partner in that company, even a sleeping one. And a partner is responsible for whatever decisions the management make.

[However,] …if one cannot [entirely avoid investment in non-permitted funds]…in the case of 401K, he/she has to be religiously aware and play smart in selecting the funds that have the least interest in them and each year give away to Islamic charitable organizations an estimated amount coming from interest sources in these funds.

[Furthermore, one should be aware that] …a study [was conducted under the supervision of] … a group of Shari’ah scholars that resulted in selecting about 600 stocks in the American market of companies that have least involvement with interest. On the basis of this study the Dow Jones company created the “Dow Jones Islamic market index” (DJIM) (//us.spindices.com/index-family/shariah/dow-jones-islamic-market); one can find this list on the internet under Dow Jones Company. And there are several mutual funds established on the basis of these stocks that one may try to invest in for your 401K and other investments.”

Dow Jones Islamic Market Index (DJIM)

The DJIM, launched in 1999 in Bahrain, was the first index created for investors seeking investments in compliance with Muslim Sharia law. The DJIM has an independent Shari’ah (Islamic Law) Supervisory Board. The DJIM screens have been adopted by the Accounting and Auditing Organization for Islamic Financial Institutions (“AAOIFI”)-Standard 21. ‘ The DJIM measure the performance of a global universe of investable equities that have been screened for Shari’ah compliance consistent with Dow Jones Indexes’ methodology. The selection universe for the DJIM family of indexes is the same as the universe for the Dow Jones World Index. (Wikipedia.org)

Excerpt from ‘Guide to the Dow Jones Islamic Market Indexes’:

Based on the DJIM Index Shari`ah Supervisory Board established parameters, the businesses listed below are inconsistent with Shari`ah law. The majority of Shari`ah scholars and boards hold that these industries and their financial instruments are inconsistent with Shari`ah precepts and hence are not suitable for Islamic investment purposes. Although no universal consensus exists among contemporary Shari`ah scholars on the prohibition of tobacco companies and the defense industry, most Shari`ah boards have advised against investment in companies involved in these activities. Income from the following impure sources cannot exceed 5% of revenue.

  • Alcohol
  • Tobacco
  • Pork-related products
  • Conventional financial services (banking, insurance, etc.)
  • Weapons and defense
  • Entertainment (hotels, casinos/gambling, cinema, pornography, music, etc.)

During the component selection process, each company in the index universe is examined based on its revenue allocation. If the company has business activities in any one of the following sectors defined by Dow Jones Indexes’ proprietary classification system, it is considered inappropriate for Islamic investment purposes and is excluded from the index.

  • Defense
  • Brewers
  • Distillers & Vintners
  • Food Products
  • Recreational Products
  • Tobacco
  • Food Retailers & Wholesalers
  • Broadcasting & Entertainment
  • Media Agencies
  • Gambling
  • Hotels
  • Recreational Services
  • Restaurants & Bars
  • Banks
  • Full Line Insurance
  • Insurance Brokers
  • Property & Casualty Insurance
  • Reinsurance
  • Life Insurance
  • Consumer Finance
  • Specialty Finance
  • Investment Services
  • Mortgage Finance

Companies classified as Financial according to Dow Jones Indexes’ proprietary classification system are considered eligible if the company is incorporated as an Islamic Financial Institution, such as:

  • Islamic Banks
  • Takaful Insurance Companies

Companies classified as Real Estate according to Dow Jones Indexes’ proprietary classification system are considered eligible if the company’s operations and properties are conducting business within Shari’ah principles.

According to Dr. Hatem al-Haj, Member of the Fatwa Committee of Assembly of Muslim Jurists in America, “Most of the scholars would allow one to take part in [401K] plans and purify the money from the haraam portion when one starts to receive it. The reason why they allow it is to not lose the contribution of the employer, which will otherwise not contribute to your pension. This fatwa is based on istihsan (juristic preference), maslaha mursalah (consideration of public interest) and various fiqhi principles, including “Harm is to be availed as long as possible. “, “Trivial things are exempt.” “Consequential matters are not treated with the same scrutiny as original.”

[So,] if one decides to take part in these plans, then one should:

  • Talk to the manager of the portfolio and ask him to help you choose mutual funds that have the least percentage of companies that deal in unlawful transactions. Sometimes one can even have an isolated portfolio in which one can select the companies to take part in.
  • When one starts to get the pension, he/she should purify it by spending in the way of Allah a percentage of the income (that doesn`t count as charity, but one will be rewarded for purifying your money). The percentage that one needs to pay in purification is contingent upon the percentage of haraam in the portfolio.”

According to Dr. Main Khalid Al-Qudah, Member of the Fatwa Committee of Assembly of Muslim Jurists in America, “Investing in 401(K) Plan usually gives one the option on how you want to invest. Obviously, one needs to avoid the following prohibited categories of investment: Stable value fund (saving account or CD), balanced fund (50% stocks & 50% bonds). While you can go with the aggressive stock funds, international stock funds, and the like… The 401(K) portfolios are unlimited in the market. Every investment company comes up with different packages to satisfy the different needs, preferences, and level of risks its clients are willing to take… General guidelines could be given here to assure the permissibility of such an investment, like investing in the stocks of the companies who hold Halal core business, avoiding derivatives and bonds, and no guaranteed profit allowed, rather the investment must be subject to gain & loss.”

Allahu A’lam (Allah (سبحانه و تعالى) knows best) and all Perfections belong to Allah, and all mistakes belong to me alone. May Allah (سبحانه و تعالى) forgive me, Ameen.

Wassalaam