Hobson: 401(k) Plans Need to Reach Out to Minorities

In a Webinar today, Mellody Hobson, president of Ariel Investments, said 401(k) plan sponsors should pay attention to the savings differences among minorities.

She asserted that if the minorities in America do continue to save at lower rates than Americans, it will be a burden on society. “This isn’t just a black or a brown issue—it is everyone’s issue.”

She cited the annual study by Ariel and Hewitt Associates, which found significant disparity in 401(k) savings rate among black and Hispanic participants when compared to their white and Asian counterparts (see “African-Americans, Hispanics Lag on Retirement Savings” and “Audio Interview with Hewitt Associates”). When looking at participants at Fortune 500 companies, the study found that blacks and Hispanics have lower participation rates, contribute less, and invest less in equities than white participants. Furthermore, a startling four in 10 black participants took out a loan from their retirement plans.

The result: Black and Hispanic participants have lower account balances—in fact, 40% lower than whites in the income bracket of $30,000 to $60,000. Even in the higher income brackets, the disparity is evident.  Furthermore, Hobson pointed out that the recession could only exacerbate the data, as unemployment rates are higher in minority groups. 

What Employers Can Do

Hobson used the example of McDonald’s, which specifically targeted black managers, using automatic enrollment and an enhanced match. In that cohort, McDonald’s successfully increased participation from 50% to 95% from 2004 to 2007 and saw account balances go up 41%.

Hobson said plan sponsors can start by examining their plans by race and also understanding the differences among minorities. For instance, she said many minority groups do not like getting their information from the Internet, which is where many companies are gravitating.

She noted that sometimes even the imagery on enrollment books of a white couple on the beach can leave minority groups out. “We need more diverse images with the communications that go along with plan documents,” Hobson said.

Many financial firms have expressed an interest in reaching out to minority groups, and offer more targeted information. Financial advisers can help plan sponsors analyze different groups and target them with different methods (see “Zooming In”).

Financial Literacy

Hobson blames a lack of financial literacy classes for aiding the savings disparity among minority groups. “We don’t learn about investing in school in America, which continues to boggle the mind,” she said. “You can take an elective in woodshop or auto, but take nothing about investing.”

Hobson wants to see some action on this front from the government, and is hopeful that financial literacy will be taught in schools.

She also recommended that the government ask companies to look at their 401(k) plan data by race. The government might also try doing that with its own plan, she suggested, which is one of the largest in the country. 

Furthermore, Hobson suggested it would help minority groups if loans were portable from one employer to another. She also thinks loans should have a grace period (similar to college loans) in which workers who are laid-off can receive a loan deferment before it’s considered a default.

Hobson emphasized the importance of helping minorities save in 401(k) plans. The 401(k) is an important lever to helping minorities reach financial security, as “the gateway to investing in the stock market for minority individuals,” she said.