I understand that the most recent Ariel / Aon Hewitt Study, focusing on savings disparities across racial and ethnic groups, was recently released. Your earlier study of two years ago found really significant differences in retirement savings rates and highlighted that those rates for African-Americans are especially low. Have we as a group, in these last two years, made any progress toward saving for our future in terms of 401(k)s?
I am really glad that we are going to be talking about this study because we at Ariel and Aon Hewitt, along with our partners at The Joint Center on Political and Economic Studies and The Raben Group, have really made this a labor of love. Let me really quickly me tell your listeners what precisely this study is all about the data we collected so that they understand the challenges we faced.
This study examined the defined contribution plans of 60 large U.S. corporations across a variety of industries and sectors; we are talking real heavyweights like McDonald’s, Xerox, AT&T, and UPS. The goal was to determine who was saving how much and why, and then to use this information to recommend ways in which for policy makers as well as employers to help minority workers adequately prepare for retirement. The data we collected represents approximately 2.4 million employees. We looked at race, ethnicity, gender, salary, age, job tenure, and 401(k) and 403(b) balances. This was not a small undertaking.
What we have found is that African-Americans and Hispanics are still lagging behind their White and Asian-American counterparts, across all income levels. We have found that African-Americans have a dramatically higher incidence of depleting their retirement accounts. And since these monies are generally not put back into the retirement accounts we are essentially throwing away our own nest eggs.
Now, we have made some progress. For instance, plan participation rates inched up from a 2007 level of 66% to a current level of 68% in our community. We also can’t forget that the recession hasn’t made things easy for anyone. But we as a community need to be more vigilant in making sure that our future is secure.
How do we go about doing that? What are some ways that African-Americans can begin to buck this disturbing trend?
The answer to this is really two-fold. And what I mean by this is that we need to attack this trend both by educating individuals and by get employers to make some serious changes that will result in increased savings toward retirement.
The three main ways participants in defined contribution plans can deplete their retirement savings accounts before retiring are by taking hardship loans, taking out regular loans, and by cashing out their accounts upon terminating a job. Here are some truly disturbing statistics that we found:
• In 2010, in the $30,000 – $59,000 salary range, 11.9% African-Americans had taken a hardship withdrawal from their retirement savings. Compare that to 4.6% for Hispanics, 2.6% for whites, and 2.1% for Asian-Americans.
• In 2010, 49% and 40% of African-Americans and Hispanics, respectively, had outstanding loans on their retirement accounts compared to just 26% and 22% of Whites and Asian-Americans, respectively. And as income increases, even in the over $120,000 range, we see that loan levels remain uniquely high.
• The highest percentage, by race, of individuals who cash out their retirement savings account are African-Americans at 63%. Hispanics follow closely at 57%, while Whites cash out 39% of the time, and Asian-Americans do the same in only 34% of similar occasions.
To change these numbers we’ll need to do a few things:
• Communicate with employees – Defined contribution plans are complex and participants take on huge responsibilities when they save and invest in their plans. While plan design is critical, helping participants better understand these complex topics should be a priority.
• Ease loan repayment – Employers should extend the time a terminating employee has to pay back a loan form 60 days, which is the typical repayment period, to a minimum of twelve months. A grace period grace period should also be allowed while an individual is collecting unemployment. This will less the need to cash out their savings plan to make repayment.
• Deter early withdrawals – The penalty for early withdrawal, it is our opinion, should be increased from 10% to 15% to deter fund withdrawal for non-critical needs.
Did this study find any areas of hope to suggest that we might be able to get things on course? Is there some data to suggest a bit of hope?
Actually there is a shining beacon of hope that we have found because of this study. It’s not perfect but auto-enrollment has produced some incredible, across-the-board numbers. Listen to this:
• When not subject to auto-enrollment 64% of African-Americans participate in defined contribution plans. When their employer uses auto-enrollment, 82% of African-Americans participate.
• For Hispanics the percentage increase is even greater at 24%
• Whites and Hispanics also see an increase in participation, 9% and 11%, respectively.
These are fantastic numbers. Now here’s the not perfect part. When individuals are auto-enrolled, as opposed to self-enrolled, their contribution rates are a good deal lower. But we think the simple solution to this is to use auto-enrollment to it’s full potential by:
• expanding auto-enrollment to all non-participants on a one-time or periodic basis
• setting enrollment rates at a level equal to the company match or simply using higher rates of 4% to 6% of pay
• auto-escalating contribution rates yearly by a percent or two
If employers took these suggestions to heart I think we would see a very different outcome for the next Ariel / Aon Hewitt Study. And those different outcomes would be extremely encouraging.
Mellody Hobson is President of Ariel Investments, a Chicago-based money management firm.