Study: Plan Design Key to Race Equality in 401(k)s

A new analysis from the Center for Retirement Research at Boston College suggests the best way to boost 401(k) saving among minorities is to improve plan design and education for disadvantaged workers.

Contribution to a 401(k) plan varies among different racial and ethnic groups. However, the researchers found that for comparably situated individuals, blacks, whites, and Hispanics respond in a similar fashion in terms of joining a 401(k) plan and deciding how much to contribute.

Using data from the Survey of Consumer Finances for 2001, 2004, and 2007, the CRR found about 55% of whites and blacks are eligible to participate in a 401(k) plan, while only 37% of Hispanic workers are. However, more than 77% of whites who are eligible actually participate in their employer’s 401(k) plan, compared to less than 70% of blacks and Hispanics.

The average percent of salary whites contribute to their plans is 6.5%, compared to 5.9% for blacks and 5.5% for Hispanics. Even after controlling for age, job tenure, and earnings, the patterns persist.

However, the researchers found the ethnic discrepancies no longer existed once socioeconomic factors and plan characteristics were taken into account.

The report cited studies that added to the equation information on whether the individual graduated from college, non-pension wealth, defined benefit wealth (the present discounted value of expected benefits), and whether the individual owns a home—a  proxy for having a longer planning horizon. Considering these factors, race is no longer a determinant of plan participation.

In the case of the contribution decision, studies that considered characteristics of the plan, such as the nature of the employer match and the ability to borrow, found the combination of individual and plan characteristics completely eliminates the relevance of race/ethnicity in the case of blacks and Hispanics.

In all cases, Asians seem to participate more and contribute more than any other race studied.

The CRR’s Issue Brief is here.

See also: “Audio Interview with Hewitt Associates:” What can plan sponsors and advisers do to lessen the savings gap among racial and ethnic groups?