Racial Disparities in Retirement Investing

The Ariel/Aon Hewitt study, 401(k) Plans in Living Color II. Ariel Education Initiative and Aon Hewitt. April 3, 2012
The study examined the defined contribution plans of 60 large U.S. organizations, representing 2.4 million employees. The results reveal retirement plans of African-Americans and Hispanics were hit especially hard during the Great Recession. Key recommendations are outlined for policy makers and employers to help minority workers adequately prepare for retirement.

See below for 2009 Ariel/Hewitt Study
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The African American Financial Experience. Prudential Financial Study. Full Report. April 2011.

…When it comes to retirement readiness, the study found that only two in 10 African Americans believe that they are on track to meet their planning and savings goals for retirement, and nearly twice as many say they are way behind or haven’t even started. In fact, the study found that 60 percent of African Americans surveyed have less than $50,000 in company retirement plans and only 23 percent have more than $100,000.
While most Americans expect company-sponsored retirement plans to be the primary source of retirement income, African Americans are slightly less likely than the general population to put money into these plans on a regular basis. And they are three times more likely to tap into their 401(k) or similar plans to meet immediate financial needs.

“African Americans are looking to their employers for information, advice, and tools to help bolster their savings and better plan for their financial goals,” said Sharon C. Taylor, senior vice president of human resources at Prudential. “Clearly, companies need to do more if they are going to help African Americans achieve financial security, both as individuals and in the workplace.”

…The study also found:

  • While 82 percent of African Americans believe maintaining their current lifestyle in retirement is critical, only one-third feel confident they will be able to accomplish this. In addition, 83 percent place critical importance on not becoming a financial burden on loved ones, but just one in 10 is confident of being able to achieve that goal.
  • African Americans say their most important future financial needs include building wealth portfolios and retirement nest eggs as well as transferring wealth to their heirs.

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African-Americans and Retirement. Bankrate.com. Jennie L. Phipps. April 13, 2011
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401(k) Plans in Living Color: A Study of 401(k) Savings Disparities Across Racial and Ethnic Groups—The Ariel/Hewitt Study. Ariel Education Initiative and Hewitt Associates. July 2009 (Full Report).

…Significant differences can be found across race and ethnicity in the way U.S. employees save and invest in their 401(k) plans. Regardless of age or income, African-American and Hispanic workers have lower participation rates and contribute less to their 401(k) plans than their white and Asian counterparts. As a result, their 401(k) account balances are negatively impacted and chances for a comfortable retirement significantly compromised.

African-American workers are less likely than Hispanics, whites and Asians to invest in equities. African-Americans are also more likely than the study population overall to have a loan and are more than twice as likely to take a hardship withdrawal from their 401(k) plans.

…The study outlines five decisive recommendations for policymakers and employers:

  • Encouraging employers to voluntarily collect and report 401(k) plan data by race and ethnicity.
  • Modifying loan requirements to decrease the likelihood of default.
  • Mandating financial education at all levels in both private and public schools to boost financial literacy.
  • Designing 401(k) plans in a way that benefits a broad, diverse employee base.
  • Communicating and educating employees in a way that helps them make wise choices. 

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How to Close the Savings Gap. Mellody Hobson. Black Enterprise. October 2009.
Mellody Hobson, President, Ariel Investments, on the Ariel/Hewitt Study.

…When it comes to retirement savings plans, African Americans and Hispanics participate less often, contribute less money, and take out more loans and early withdrawals than our white and Asian counterparts….In the end, each individual is ultimately responsible for his or her retirement nest egg. Even so, employers and government can address these disparities.

  • Forget Fear. Mellody Hobson. Black Enterprise. April 2011. Mellody Hobson, President, Ariel Investments, shares three steps you can take to “stay the course” while saving for retirement.

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Michelle Singletary, the Washington Post’s personal finance columnist, provides additional insights on the Ariel/Hewitt study’s findings:

Putting Minority Investing Habits In Context. Michelle Singletary. Washington Post. July 12, 2009

.…I don’t doubt Ariel’s commitment to investor education. But we’ve known for at least 10 years that minorities are not investing at the same rate as whites. The more pertinent question: Why is there still a gap?

The study gives no answer. Neither does the joint news release from the two companies, or most media reports. In an interview, Mellody Hobson, president of Ariel Investments, said she thinks minorities are investing less for five reasons:

  • They don’t know enough about investing.
  • They have misinformation about investing in a 401(k) plan.
  • They have trust issues.
  • When they do invest, minorities choose more conservative options such as real estate and insurance products.
  • They have less exposure to the stock market.

Every reason reflects on the investing acumen of minorities. However, studies show many companies haven’t done the best job of explaining investment options or providing advice to all of their 401(k) participants. Is it so hard to appreciate that many new investors would be leery of investing their money in the stock market, especially of late? And the numerous scandals in the investment community don’t exactly engender trust among a group of people who have experienced institutional mistreatment for decades.

What I’m sure Ariel and Hewitt would find if they dug deeper is that class, culture and socioeconomic conditions are determining factors in how much people invest. For example, are the data comparing first-generation minority investors with second- or third-generation middle- or upper-income investors?

First-generation investors may have significantly more debt — such as student loans — than second-generation investors, who may have had inheritances or established investment portfolios to bankroll college for their children.

First-generation investors may be more likely to use the money they would otherwise invest to help extended family members. Could it be that some Hispanic employees may be contributing less to their 401(k) plans because they are sending money to relatives here and abroad?

It’s also likely that first-generation investors are spending more than they should on consumer purchases, which isn’t unusual for a generation new to better-paying corporate jobs.

And why would African Americans and Hispanics borrow more from 401(k)s?

Perhaps they couldn’t tap their home equity for needed cash, as other workers have in the past. We know African Americans and Hispanics have lower homeownership rates — for a number of reasons — so they may have reached for the only large pot of money available.

Given those many variables, we ought to be wary of these reports measuring minorities against whites. Without a deeper understanding of what motivates investors, the blanks cannot be filled and companies can’t design appropriate marketing or education programs to boost 401(k) participation.
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Federal Employee Participation Patterns in the Thrift Savings Plan – Calendar Year 2007. United States Office of Personnel Management (OPM) Report. April 2010.
A study of federal employees prompted by the Ariel/Hewitt study.

  – Kohl Releases OPM Report on Racial and Gender Disparities in Federal TSP Participation. Press Release. May 26, 2010.

  – Government Report Reveals Minorities are Significantly Less Prepared for Retirement than their White Counterparts. Ariel Education Initiative

Despite overall high participation in the Thrift Savings Plan (TSP), the equivalent to a 401(k) retirement plan for federal employees, there are stark racial disparities in participation rates, salary deferral rates and TSP balance. Minorities are less likely to participate in TSP than their white counterparts (82.5% compared to 87.8%), and when they do, minorities contribute about 25% less, resulting in smaller account balances at the time of retirement.

“The findings of OPM’s analysis are consistent with the Ariel/Hewitt study, which shows significant differences across race and ethnicity in the way individuals save and invest in their 401(k) plans,” said Alison Borland, Retirement Outsourcing Strategy leader for Hewitt Associates. “We believe the report serves as yet another call to action for employers and the government to find ways to ensure every American has the tools and resources needed to prepare for retirement….”
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