Retirement and the savings gap
It is well known that there is a retirement savings gap between white workers and non-white workers. A recent PSCA webinar explored the nature of this gap, why it happened, and ways plan sponsors can help close it for their employees.
The webinar was presented by Uche Enemchukwu, JD, co-founder and CEO of NELU Diversified Solutions (and former plan sponsor) and Sudipto Banerjee, PhD, VP, Retirement Thought Leadership at T. Rowe Price.
Dr. Banerjee presented research highlighting the magnitude of the savings gap as well as recent Transamerica research on retirement savings behaviors by race, while Ms. Enemchukwu provided some context around the data, examining the savings gap through a socio-environmental lens. , and offered concrete steps that plan sponsors can consider and implement to help close the savings gap among minority workers.
To understand the racial savings gap, and to meaningfully address it, you must first understand the systemic barriers to savings faced by minority workers. Three barriers are discussed in the webinar: access, income, and other behavioral factors.
The access deficit
Retirement plans are the main source of wealth creation for Americans, but if you look at median wealth rates by race, white Americans have almost eight times the wealth of black Americans – which raises the question of why the number one creator of wealth for Americans is not creating wealth in equal measure.
Forty percent of workers in the private sector do not have access to a workplace pension plan, and we know this is correlated with size, with smaller employers less likely to offer a plan. According to Dr. Banerjee’s calculations based on the Current Population Survey, nearly 60% of white workers in the private sector participate in a plan (of all workers, whether a plan is offered or not) compared to 40.5% of black workers. and 31.0% of Hispanic workers.
When adjusted to consider only employers who offer a plan, the gaps narrow but are still there — 90.4% of white, 81.0% black, and 82.2% Hispanic workers participate. The participation gap – those who don’t participate when offered a plan – is highest among black workers, suggesting there’s more at stake here than *just* access to a plan .
The income gap
The income gap is also at play – lags in participation among the lowest paid workers and black and Hispanic workers are overrepresented in this group. The median income of black and Hispanic workers is 73% that of white workers.
The savings gap, however, is larger than the income gap – the median 401(k) balance for black workers is 58% that of white workers, and for Hispanic workers the median is 53 % that of white workers. This indicates that there are factors other than access to and participation in an income suppression scheme by minority workers.
Even by fixing these two (very big) obstacles, other differences emerge that can be more easily addressed at the micro level, with concrete actions that companies can take to help.
The first is the age at which employees start saving – minorities start saving later than white workers, with 38% of white workers starting before age 30 compared to 18% of black workers. As we know the power of compounding over time, starting retirement savings early can make a BIG difference in account balances and wealth creation. This may have to do with black workers entering jobs that offer plans later in life than white workers (some research indicates that it takes minorities longer to complete college, largely due to some of the other factors mentioned below).
The second is debt burden – we know that debt is a barrier to saving, and minorities, on average, have more debt in all areas: student loans, medical debt, and credit card debt.
There are also race differences in financial priorities. Although all races cited saving for retirement as a top priority (in a survey of workers with access to a plan), more than 60% of Black workers cited saving for emergencies as a priority against 40% of white workers. Some of the laws currently circulating in Congress on emergency savings can help minority workers in particular build personal savings that will then allow them to save for retirement.
Another contributing factor is the lack of a safety net and/or being a safety net for other black friends and family members. Not having a safety net puts you at higher risk for snowballing problems (no emergency savings, higher debt, delayed savings in a plan).
Close the gap
Access to plans is the first thing we need to do to close the gap, and many states are already implementing measures to provide plans when companies don’t. For companies that already offer a plan, you may want to check if there is an income gap – take a look at your employee demographics and your salary information – are there any gaps that your business can fill? People in low-wage jobs, even with access to plans, are unwilling/unable to afford to participate.
After considering the two main barriers (access and wages) – Ms. Enemchukwu indicates that there are three other main types of barriers that the plan sponsor should consider: member-level barriers, plan-level barriers and at the supplier level. Participant-level barriers include social determinants, perceived costs, mistrust, stigma, and financial literacy. There is a history of distrust among minority workers, especially black workers, of financial institutions that have a long history of financial discrimination (particularly around mortgages), and there is a distrust in asking them to put money in something they don’t understand. Education to increase financial literacy is essential to help them understand how a plan works and understand the perceived cost of participation. There is also a stigma around asking for and accepting HR advice, especially from white staff. Representation goes a long way in building trust, having a diverse HR staff that understands some of these systemic issues that are a barrier to savings can be the key to unlocking that particular barrier.
Plan-level barriers include plan design features and plan communications. Features like auto-enrollment, which has been touted as a way to increase participation for all workers, benefit white workers more than minority workers, primarily due to the income gap. One plan design feature that can help is a non-optional contribution to low-wage workers. It can be weighted by years of service, age, and/or income and can help pass non-discrimination tests while helping low-income people close the income gap, at least in part of the retirement plan and to contribute to retirement savings, but also to the creation of wealth. time.
Barriers at the supplier/advisor level include a lack of representation, a lack of minorities in the industry, which goes back to trust, as well as biases (intentional or not) that can come from white advisers working with employees belonging to minorities.
Understanding the systemic and socio-environmental frameworks that affect your participants is key to helping them overcome barriers to savings. It usually boils down to systemic issues – lack of a safety net due to socio-economic factors, lower generational wealth, distrust of financial institutions, and access and income gaps. In order to “fix” the racial savings gap, Enemchukwu says you have to “get to the core of the issues and not put a band-aid on them, get to the root cause – the plan is a system, it’s not is not going to be fixed if you don’t address the main problem.
Looking only at the numbers without considering the systemic, social and environmental factors that contribute to the gap misses the point. Many plan sponsors are aware of these issues, but they often feel “too big” and too systemic to solve “at home”. There are some specific things companies can do to help, if they want to: recognize the gap, close the income gap, design the plan with fairness in mind, and then provide the supports to help overcome the barriers. behavioral by providing education to increase financial literacy (and engage workers in the plan early), provide financial wellness programs, and make an effort to increase diversity among HR staff and vendors/advisors.