Accumulation of retirement savings is a three-step process, each requiring an active decision, but the first and the most important of the three steps remains elusive, particularly for many minority workers, a new study finds.
Participation, contributions and investment allocation, of course, make up the three steps, and the adoption of auto features and qualified default investments have helped with the last two, but access to retirement plans has been a persistent problem, as some employers, particularly smaller ones, struggle to offer their employees a plan.
In a new white paper, Race, Retirement, and the Savings Gap, based on its annual Retirement Savings and Spending survey and analysis of the Census Bureau’s 2021 Current Population Survey, T. Rowe Price found that about half of all workers participate in a retirement plan of some kind. However, when a retirement plan is offered by an employer, participation increases significantly to 88.2%.
In an earlier report, T. Rowe found that black and Hispanic workers significantly lag in participation and savings compared with white workers, furthering the notion that plan access and plan design can help to close this gap and encourage other positive financial behaviors as well.
Participation Gap
On average, minority workers earn significantly less than their white counterparts, and to a large extent, the difference in income drives the difference in plan participation rates, the paper notes.
While nearly 6 in 10 white workers participate in a retirement plan, this is compared to 4 in 10 black workers and 3 in 10 Hispanic workers. These two racial groups with the lowest retirement plan participation rates also have the largest share of their workers in the bottom two income groups. The research also finds that the racial and ethnic participation gap narrows significantly when a retirement plan is offered. Compared with whites (90.4%), blacks (81.6%) and Hispanics (82.2%) have only slightly lower take-up rates, the research found.
Not surprisingly, the research also reveals a strong positive correlation between firm size and retirement plan participation. For smaller firms with less than 25 employees, T. Rowe Price found that only 28.3% participate in a retirement plan. Larger firms (more than 1,000 employees) have a much higher participation rate (63.5%).
And the fact that smaller employers struggle to provide a plan matters because they employ a disproportionate number of minority groups. For example, a large share of Hispanics (37.8%) and workers from mixed and other races (30.1%) work for smaller firms (less than 25 employees), which are less likely to offer retirement plans.
“Clearly, the combined effect of the inability of smaller firms to offer a retirement plan and large shares of minorities working for those smaller firms is contributing to the racial and ethnic gaps in participation rates,” writes Sudipto Banerjee, Vice President of Retirement Thought Leadership at T. Rowe Price and author of the paper.
As such, improving the number of small businesses offering retirement plans could help close the racial gap in retirement savings, he says, adding that the research found that there is virtually no difference in take-up rates among employees of smaller firms and larger firms.
Narrowing the Disparities
Yet, the racial gap between income and wealth suggests that lower income isn’t the only challenge making it harder for Blacks and Hispanics to save and build wealth, the paper notes.
A fundamental principle of saving is to start early and save regularly, but the firm also sees a significant gap between whites and other minorities. According to the research, 38% of white participants say that they started saving for retirement before age 30, compared with only 18% of blacks. Debt may also be hindering minority participants’ retirement savings progress. Black and Hispanic participants are more likely to hold every type of debt than their white counterparts.
What can the retirement industry do to narrow the disparities? While there is no simple solution, the paper suggests there are steps the industry can take, as increasing access to retirement plans is not only an issue for policymakers.
“These findings highlight that the first and most important step toward closing the retirement savings gap is to expand access to retirement plans,” says Banerjee. “The retirement industry can act now to help close the gap by encouraging employers to not only sponsor plans but to incorporate plan design levers, such as auto-enrollment and auto-escalation, and by offering financial wellness programs.”
Banerjee also writes that if more employers offer programs that help participants with things like emergency savings, debt management and budgeting, it could reduce financial stress and help improve retirement savings outcomes.
Minorities are also receptive to advice and are looking for help from the most familiar sources, he says. “The workplace remains the most important source of advice and support for all retirement savers, and more so for minority savers,” Banerjee emphasizes. “This is a great opportunity for employers to try to improve the financial lives of employees who consider the employer a trusted source of financial advice.”
