Ariel Education Initiative and Aon Hewitt found more than two-thirds of workers who took a withdrawal in 2010 reported they needed the money for an unexpected emergency, debt or day-to-day living expenses. African-American employees took hardship withdrawals more than any other ethnic group at 8.8% in 2010, compared with 3.2% of Hispanics, 1.7% of whites and 1.2% of Asian workers.
In addition, half of African-American and 40% of Hispanic employees carried a loan balance at the end of 2010, compared with just 22% of Asians and 26% of whites. The vast majority of workers who leave their employers with a loan outstanding—80% of African Americans, 76% of Hispanics, 71% of whites and 67% of Asians—subsequently default on them.
Aside from loans and withdrawals, cashing out is one of the most significant issues putting retirement savings at risk—particularly for African-American and Hispanic employees. Two-thirds (63%) of African-Americans and 57% of Hispanics who left their employer in 2010 cashed out their balances. In comparison, 39% of white employees and one-third (34%) of Asian workers did the same.
Ariel and Aon Hewitt found there is a racial gap in defined contribution (DC) plan participation. Two-thirds of Hispanics and 68% of African-Americans contributed to a DC plan in 2010, while 79% of whites and 80% of Asian workers did so. Even when adjusting for factors such as age, salary and tenure, African-American and Hispanic employees were significantly less likely to have established a DC plan account.
Auto Enrollment Makes a Difference
In an effort to encourage all workers to participate, employers have increasingly adopted automatic enrollment features. More than two-thirds (67%) of employers in the study automatically enroll new hires, up from 58% in 2007. The study found the push toward auto enrollment is making a difference. Across all racial and ethnic groups, participation in DC plans dramatically increases when you compare those who are subject to automatic enrollment versus those who are not.
When auto enrolled, 82% of African-American employees participated in a DC plan, compared to just 64% of those not subject to auto enrollment. The story is similar for Hispanic workers—83% participated in their employer’s DC plan when auto enrolled, compared with 59% that were not automatically enrolled.
However, while automatic enrollment is effective at increasing participation rates, it may actually negatively affect contribution rates among all races and ethnicities. African-American workers who are auto enrolled contributed 4.3% of pay on average, compared to 6.3% for those not automatically enrolled. Similarly, Hispanic employees contributed 4.4% of pay when automatically enrolled, versus 6.6% of pay when they were not subject to auto enrollment.
White employees who were auto enrolled contributed 5.2% of pay, on average, to their DC plans; those who were not contributed 8% of pay. The contribution rate for Asian employees was 7.3% of pay for the auto enrolled, compared with 9.4% for those who self enrolled in the plan.
Employers that automatically enroll their workers tend to set contributions at a very low rate. Half the plans in the Ariel/Aon Hewitt study enrolled employees at rates between 1% and 3% of pay, while one-quarter of auto enrolled workers are at 4% or 5% of pay. Twenty-three percent set contributions at more than 6%. In addition, fewer than half (42%) of workers automatically escalate savings over time, meaning that many workers remain at these low contribution levels for long periods of time or forever.
The Ariel/Aon Hewitt study, 401(k) Plans in Living Color II, examined the defined contribution (DC) plans of 60 large U.S. organizations, representing 2.4 million employees. The study outlines key recommendations for policy makers and employers to help minority workers adequately prepare for retirement.
To download the study report, go to arielinvestments.com or aonhewitt.com.